Can I Settle My Tax Debt With the IRS?

There is good news for people feeling the weight of tax debt. You have several different options for handling your debt to the IRS, and you can often do so without sustaining a black mark on your credit. If you have less than $10,000 in outstanding tax debt, you can consider handling your debt on your own. However, if you have more that that, especially more than $25,000 it is highly recommended that you find a tax professional to help you negotiate your debt with the IRS.

A tax professional is a certified public accountant (CPA), an "enrolled agent," or a tax attorney. These are the only tax professionals that are allowed to appear before the IRS to argue your case. An enrolled agent can practice in any state, but CPAs and attorneys can only practice in the state where they are licensed. If you have state tax debt from more than one state, find an enrolled agent to help you. Otherwise, you will be fine with a local CPA or attorney.

Bankruptcy

Contrary to what some people may tell you, IRS tax debts cannot normally be discharged by bankruptcy. You can only wipe out tax debt with a Chapter 7 bankruptcy if you meet all of the following criteria:

The money you owe is for income taxes: Payroll taxes and all penalties cannot be discharged, no matter what.  

You did not commit fraud or tax evasion: Your debt must arise from a legitimate accident or a simple inability to pay.  

Your debt is at least three years old: You cannot discharge IRS debts unless they are at least three years old at the time you file your bankruptcy.  

You filed a tax return for the years in which the back taxes are owed: Non-filers receive no clemency.  

You pass the "240-day" rule: This means that your tax debt must have been assessed at least 240 days prior to your bankruptcy, or it has not been assessed yet.

If you do not meet all of the above criteria, then you will still owe the IRS 100% of what's due following a Chapter 7 bankruptcy. Tax debts can be part of a Chapter 13 bankruptcy, but you do not get to lower the total amount due - you will still owe the outstanding balance at the completion of your Chapter 13 program. In short, it is much better to pursue one of the options outlined below if you have overwhelming tax debt.

Installment Plans

Luckily, there are several ways other than bankruptcy to clear you tax debt without ruining your credit. If you can afford it, the easiest way is to set up an installment plan. Make sure that you have a clear idea of how much you can afford to pay each month. Setting up an installment plan only takes about two hours. Basically, you tell them what amount you can afford to pay each month, and they accept monthly payments until the debt is paid. This is the simplest plan, but it is only available to those who owe less than $10,000, and can pay off the debt fully within three years.

Partial Payment Plans

If you don't meet the criteria for an installment plan, you can try a new option, the partial payment plan. This is a rather complicated plan, requiring numerous forms and lots of documentation, so you probably want a tax professional to help you. Under a partial payment plan, you agree to pay a certain monthly payment, based on what you can afford, for some number of years, also based on your financial situation. As long as you pay the agreed-upon amount for the required time, the remainder of you tax debt will be forgiven.

Offers in Compromise

Another strategy which is similar to the partial payment plan is an offer of compromise. This gives you the option to pay a reduced sum, but you can choose whether you want to make payments, or pay a lump sum. There are subtle differences between an offer of compromise and a partial payment plan, so consult your tax professional if you think you may want to choose one of these plans. He or she will gather information such as how much you can pay a month, and how many months you want your payments to span, and steer you towards the right program for you.

'Currently Not Collectible'

The last plan available for dealing with your tax debt is to be declared "currently not collectible." This is a good plan for you if you have no ability to pay your bill, but are not burdened by other debts. If you are over your head in debt to many companies, you may be forced to declare bankruptcy. However, if you are current on your other bills, but are currently not earning enough income to pay the IRS a monthly stipend, you can be considered "currently not collectible." Under this plan, you will receive yearly statements on the amount you owe. Your situation will be evaluated periodically, but if you are unable to pay for ten straight years, your debt will be discharged. The guidelines for being declared currently not collectible are strict, so consult your tax professional to be sure that you qualify.

It's not hard to deal with your tax debt. If you currently owe the IRS, don't wait! The IRS tacks on late fees and penalties frequently. If you make a plan to deal with your debt, those fees will stop mounting, so you will have an easier time climbing out of the hole.

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