Keeping up with one’s finances can be a challenge, especially in the current economic climate. Most household face financial problems, arising from credit card debt, student or medical debt etc., however, tax debt might be the most severe of them all, carrying heavy penalties and consequences which can escalate quickly, if allowed to get our of control.

Best Ways to Pay Off Your IRS Debt

Approximately 10 million Americans face tax penalties each year. Most of these penalties arise from a human tendency to ‘bury one’s head in the sand’, waiting for the problems to magically disappear, however this almost always has the opposite effect. This is why it is extremely important to deal with any IRS debt promptly.

Filing tax returns in a timely manner is essential, as it can save individuals from having to pay a 5% monthly penalty, which can rise to a maximum of 25% of their owed balance, putting them in significant financial risk.

But what if they have no choice? You ask. Well, there are several ways to deal with their financial predicament. Debt reviews are here to help you, by listing the nine best ways to deal with IRS debt.

Installment Plan

Times are tough and a hefty IRS bill can cause household finances to crumble under the pressure. This is why the IRS will consider agreeing a payment plan convenient for both parties, enabling individuals to pay their tax bill in small manageable chunks.

Form 9465 is what individuals will need to fill in, in preparation to requesting a convenient installment plan from the IRS. The maximum term they can stretch your payments across is 72 months, but caution is required, as tax bills do not freeze for the next 72 months, and another tax bill, on top of the low payment plan, can still bring financial havoc.

There are companies who offer to negotiate a payment plan for individuals, however, in some cases the fees can make the situation worse. It is best that individuals try to contact the IRS themselves, explain the situation and apply for an instalment plan, without employing a middle man.

The IRS installment plans can only be arranged for individuals who do not owe more than $50,000 on their tax accounts. Payments can be made online, by phone or by accessing apps on a mobile phone.

Statute of Limitations

This can bring great relief to individuals who have had lengthy issues with IRS tax debt to deal with. The Statute of Limitations is on your side. This means that the IRS can pursue collection of tax debt for a maximum of ten years after the tax assessment has been filed. This applies to all, apart from rare and exceptional circumstances.

This is a saving grace for people who have been struggling with IRS debt for a number of years. There is a light at the end of the tunnel, and once this period is up, one can be on their way to financial recovery.

With all the aforementioned said, if there is reason for the IRS to believe there have been false, fraudulent or missing returns, then the statute of limitations does not apply. The same applies for any illegal activities an individual has carried out, relating to the IRS affairs. This means that if tax fraud is suspected, the IRS can investigate many years after the incident took place, without any limitations on time.

Offer in Compromise / Partial Debt Settlement

The IRS provides individuals and households struggling to meet their tax payments the opportunity to offer a reduced one-off payment and have it considered. This process is called ‘Offer in Compromise’, but not all is rosy.

For an Offer in Compromise to be considered by the IRS, individuals have to have filed all the relevant tax returns in a timely and accurate manner. There are also several conditions that need to be satisfied, relating to an individual’s ability to pay, their income, their expenses, their assets, and whether or not a payment of the full amount is likely to put them in significant financial hardship.

The Offer in Compromise needs to be reasonable and reflect the current state of an individual’s finances. This means that if you still have that giant car and the pool, it is unlikely that the IRS will consider letting you pay less than what it is legitimately owed.

Once your offer is accepted, an initial payment will be required. Usually this amounts to 20% of the total offer amount. The remaining amount is then requested in five or fewer instalments. There is a ‘pay monthly’ option also, for those who are accepted under this scheme.

Currently not Collectible (CNC)

This is a buying time situation. What it basically means is that if the IRS determines that an individual is unable to pay their tax bill for a particular reason, or that if paying their tax bill is likely to cause them severe financial hardship, then they may report their account as a Currently not Collectible, commonly known as CNC.

This option will freeze their account for a period of time, until the individual’s financial situation improves. The IRS will request proof of their financial status, and will then decide whether they can afford to pay or not. This does not mean that the debt will disappear, but it will buy the individual time before the collection requests start.

The IRS reserves the right to also review the CNC status of the individual’s tax account, and may file a Notice of Federal Tax Lien, in order to enable the government to ensure they have rights on their assets, should they fail to pay or come to an alternative arrangement.

Release Wage Garnishments

Apart from ceasing individuals’ bank accounts, the IRS can also garnish their wages, however, federal law states that there is a limit to how much can be garnished. This amount is usually limited to 25% of their disposable earnings.

What is meant by disposable earnings can sometimes be debatable, as some households are living month-by month, which would mean that they have no disposable earnings. The IRS and the individual need to then work in harmony, to ensure a viable settlement for both parties is achieved.

Innocent Spouse Relief

Couples file a joint tax return because of the benefits that are attached to that, however, sometimes a spouse can get relief from being liable of their other half’s tax affairs. One way to do that is to file for an Innocent Spouse Relief, this will provide relief from any additional tax owed, if it is proven that an individual’s spouse was at fault of not reporting their income properly, or claimed the wrong benefits.

There other avenues for individuals, especially if they are no longer married, or are separated from their partner. One of these avenues involves filing for a Separation of Liability Relief. This will ensure that tax allocation is properly separated, resulting in them only being responsible for the share of tax allocated to them personally.

Stop Bank Account Levy

If individuals have reached this point, it is definitely time to take some serious action and attempt to settle their debt with the IRS. This a very serious and financially detrimental situation to be in, so the help of a professional should definitely be on the cards at this point in time.

A professional advisor will speak to them about the available ways to reduce, or clear the debt and free their bank accounts again. If there is any conceivable way to pay the debt, then the financial advisor will establish it. If there isn’t, well then it is time to file for financial hardship and follow the appropriate steps.