Owing back taxes can be a stressful and confusing situation to find yourself in. It can seem impossible to pay what you owe, making it feel like your entire financial future is at risk. Fortunately, this isn’t necessarily the case. Millions of people have been exactly where you are and found their way out. The first step is learning about the options you have at your disposal. There are a number of ways that you can handle your back taxes.
Why You Shouldn’t Ignore the IRS
One option is to ignore your back taxes completely. This is absolutely the worst thing you can do. The IRS does not just forget about money it is owed. In fact, it actually imposes penalties on those who do not pay in a timely manner. For a failure-to-file, the penalty is typically 5% of the amount owed for every month or partial month for which you don’t pay. For failure-to-pay, the penalty is 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid. Both of these penalties max out at 25%, but your debt also accrues interest. This interest has no cap and will grow indefinitely until your balance is zero. As you can see, ignoring the debt is not a viable option. It will only serve to make your situation worse.
Installment Agreements
One of the most popular options for paying back taxes is an installment agreement. This is a payment plan that allows you to pay off your tax debt in installments over an extended period of time. These are made for people who need more than 180 days to pay their tax debt. Payments are made on a monthly basis. This option is perfect for those who have some disposable income, but cannot afford to pay their debt in one lump sum. For those who can afford to pay off their debt in less than 180 days, short term payment plans are also available.
Offer in Compromise
Sometimes the amount you owe actually is impossible for you to pay, but that doesn’t mean you’re out of options. An offer in compromise lets you settle your tax debt for less than the full amount you owe. For an offer to be accepted, it must represent the most the IRS can expect to collect from you in a reasonable amount of time. To determine this, the IRS will look at your income, expenses, and asset equity. An offer in compromise can end up saving you thousands of dollars.
Currently Not Collectible (CNC) Status
If you cannot afford to pay anything due to financial hardship, you may be able to have your debt marked as currently not collectible. When this happens, the IRS will temporarily suspend most collection activities against you. However, you will still owe the full amount and penalties will continue to accrue. To qualify for this option, you will need to submit financial information that proves you are experiencing financial hardship. Having your account placed in currently not collectible status can give you some breathing room to get your finances in order, making it easier for you to pay your tax debt in the future.
When it comes to CNC status, you should also be aware of the Collection Statute Expiration Date (CSED). This is the legally mandated date when the IRS can no longer collect unpaid tax debt, which is 10 years from the date of assessment. This clock keeps ticking even while in CNC status, meaning you may be able to use CNC status to carry you to the CSED, resulting in you not having to pay your tax debt.
Paying in Full
One of the simplest options for IRS back tax relief is to pay your debt in full. This is only a viable option for those who can afford to pay their debt all at once or over a very short period of time. While this can cost a lot of money, the instant peace of mind can be worth it. Once your debt has been paid in full, you will owe the IRS nothing. You will not have to worry about penalties accruing and you can move on with your life.
Using Loans or Credit to Pay Tax Debt
Using loans or credit to pay off your tax debt can be a risky option. You are basically just transferring the debt to another entity. However, that does not mean it is always a bad idea. The key is to look at the specific numbers involved. For example, if a loan’s interest will be less than the penalties and interest incurred by lack of payment to the IRS, it can be a financially sound decision. Just make sure that you will be able to afford the loan payments to avoid damaging your credit and jeopardizing your financial future.
When to Seek Professional Help
You should seek professional help as soon as you owe back taxes that you cannot afford to pay. A tax relief specialist will be able to look at your specific case and determine which option is best for you. They will dig into your finances, determine what you can afford, and even negotiate with the IRS on your behalf. Seeking professional help with your tax debt will almost always grant you the best possible outcome.
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