Tax debt isn’t fun. It’s stressful and can be a big reason why you can’t sleep at night. It may be of some consolation to know that you’re not alone.
In 2009, over 8 million Americans owed more than $83 billion to the IRS in back taxes. That number has stayed steady in the years since. There are a lot of reasons why it happens, you just need to find a way out.
Fortunately, you’re not stuck with tax debt forever. There are a number of ways to deal with it. Do you want to know more?
Read on to discover how the IRS collects debts, how you can get out of tax debt, and gain peace of mind.
What Happens When You Don’t Handle Tax Debt?
You probably have received letters or tax bills from the IRS. You have a choice. You can choose to ignore them, or you can choose to do something about them.
You may think that the IRS will go away because you’re a small-time taxpayer and you just can’t afford your taxes. They probably have better things to do like tackle big-time tax evaders.
Leaders at the IRS said that they audit the poor because it costs less than going after rich people with a lot of assets to dig through.
In other words, your tax debt is more than fair game and you need to deal with it before the problem gets worse.
The IRS has a very detailed collections procedure that starts when you file your taxes. They’ll generate automated letters that show how much you owe, the penalties, interest, and the due date.
These will escalate to certified letters that threaten property liens, wage garnishments, or bank accounts.
If you still don’t act, the IRS can do anything like seize your property and/or your bank accounts. If you ow more than $50,000, the IRS can petition the State Department to revoke your passport.
Does Tax Debt Affect Your Credit Score?
If there is a silver lining in this dark cloud, it’s that the IRS doesn’t report your tax debt to credit reporting agencies.
Some actions taken by the IRS are considered public record. For example, a lien on your home is a public record. That may or may not appear on your credit report. That may appear on a background check as well.
Ways to Pay Off Tax Debt
You can see that it pays off to take care of tax debt as soon as possible. Ignoring it will only make the matter much worse. These are some of the options you have at your disposal to pay your tax debt.
- Keep Filing Taxes
The one thing that you need to do is to continue to file taxes. Even if you know that you can’t afford to pay the tax bill, file anyway.
You can file for an extension, which would give you until October to pay your taxes. The IRS can impose penalties if you fail to file on time.
- Know the Statute of Limitations
The IRS will only try to collect your tax debt for a certain period of time. The statute of limitations is 10 years, after which the IRS will stop trying to collect the tax debt.
That doesn’t mean that you can game the system to run out the clock. The IRS will only add that time back on.
- Pay in Full and Partial Payments
Do you think that you can pay the tax debt in full within 120 days of filing taxes? In that case, you’ll want to set up this agreement on the IRS website.
What you can do is pay off as much as you can during tax time and then pay off the rest within the 120 day period. You may be assessed penalties and interest, but you know that the collections process won’t go beyond 120 days.
- Installment Payments
You can do a partial payment for what you can pay now and then set up an installment plan that extends beyond four months.
This is also an option if you have no money set aside for taxes and were taken by surprise. You can apply online or call to have an installment agreement set up. There’s also a fee to enter into an agreement.
You do need to make all of your payments on time. The IRS can cancel the agreement and send you a notice to pay in full.
- Get a Fresh Start
If you’re in tax debt going through a financial hardship, like the loss of a job, you have a couple of options. The first is to take advantage of the Fresh Start Program.
This is also called an offer in compromise. You basically ask the IRS to settle your tax debt for less than the amount owed.
Find out more about IRS fresh start program here.
- Ask for Not Collectible Status
The other option you have in financial hardship is to seek not collectible status. You can let the IRS know that you are experiencing a financial issue and you can’t pay your tax debt.
They will stop the collections process for a period of time while you get back on your feet. Your account can be not collectible for up to a year.
Get Out of Tax Debt
Debt is a reality for most Americans. While you can always work with most creditors to get out of debt, you always want to prioritize tax debt.
The IRS is serious when it comes to paying taxes. There are serious consequences if you just ignore the problem. The IRS really doesn’t want to take your property and assets. They’d much rather work with you and they have a number of ways for you to pay your tax debt.
You have to overcome a lot of fear and take that first step. Get the help of a tax professional if you need to, but you have to do something. Once you take action and have a plan, you’ll feel much better about your debt.
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