Tax is something you can’t avoid, no matter how much you want. You can avoid credit card debt by spending as per your means. You can even use cash to avoid credit card debt. But we can’t say the same thing with regards to tax debt. You have to pay income and other taxes every year. If you fail to pay your taxes on time, then that will accumulate over time along with penalties and make your life stressful. If you have tax debt then how can you pay it off?
Tax debt is different from credit card debt. When you owe money to the IRS, they can take money from your bank account or revoke your passport or garnish your wages. However, in the case of credit card debt, creditors cannot levy your bank account or garnish your wages without receiving judgment from the court. Tax debt is also different than student loans. You can’t evade your tax debt. So, if you have tax debt then how can you pay it off and reduce your financial stress?
How Can You Pay Off Your Tax Debt and Lead a Stress-Free Life?
The smartest option is to pay off your tax debt on time and reduce stress. File your income tax returns on time even if you don’t have the money to pay the IRS. However, if you cannot file your income tax returns on time, then at least file for an extension to avoid late penalties, which can go up to 25% of the balanced owed. If you avoid filing your income tax returns on time, then your tax due will grow in leaps and bounds.
Here are the other options to pay off your tax debt.
Take Advantage of the Offer in Compromise
The offer in compromise option helps you to get rid of your tax debt by paying less than what you owe to the IRS. In this option, the IRS allows you to pay less than what you and fulfill your tax obligations. However, it is not that easy to qualify for the offer in compromise option. There are several valid reasons behind it.
First of all, you will not qualify for an offer in compromise option if you have not filed your tax returns in the last few years. The IRS will reject your application and refund you the application fee. However, they will keep any initial payment you made on the overdue balance.
Secondly, you need to show enough documents to prove that you are in financial hardship. You have to convince the IRS that you do not have money to pay off your tax debt, and the situation is less likely to improve in the future also.
The IRS must be convinced that the offer in compromise is the best option to collect payments from you. They should be a hundred percent sure that they cannot connect a higher amount in the usual collection statute.
You can seek advice from a tax professional to know what documents you have to submit and when. The tax professional can also inform you about the steps that you need to take for the required preparations. You can find Form 656B on the IRS official website to get the instructions for completing the offer in compromise formalities.
Request for an Installment Agreement
You can pay off your tax debt in installments. The IRS offers various types of payment plans to taxpayers. One of these payment plans is the installment agreement, where you can pay off your tax debt in monthly installments.
You can use Form 9465 to apply for the installment agreement. Otherwise, you can call the IRS or submit your request via mail.
Determine the amount you can pay every month to the IRS and inform them. The IRS will review your request. They will either approve your request or discard it. So be careful at the time of determining the amount you can pay every month. The IRS will approve or reject your application based on this amount.
There is one small disadvantage of this payment plan. You have to pay an additional fee to the IRS on top of your monthly payment amount. The fee usually depends on two factors:
The first one is the payment mode. You can pay directly from your checking account or use any other payment mode. Usually, the IRS charges lower fees if you opt for the direct debit option.
The second one is the application mode. You can apply for the installment agreement option online or via mail or phone. Online applications usually come with low fees.
If your income is low, then you can request the IRS to waive off your fees by submitting Form 13844.
Pay Off Your Tax Debt in 120 Days
Suppose you have just filed your income tax returns and discovered that you owe more than what you have anticipated.
You do not have the full amount in your checking account. So, what you can do is pay whatever amount you can right now. Collect the remaining amount from somewhere else and pay off your tax debt in the next 120 days. The IRS doesn’t charge any additional fee for this option. You can call the IRS or set up the payment arrangement online.
However, there is one disadvantage of this debt relief option. You have to pay late fees and penalties along with the remaining amount. The longer you take to make your payments, the more you have to pay on your tax. The interest, late fees, and penalties will accrue each month. So, if you can, try to pay off the remaining amount as soon as you can save money.
What Are the Other Ways to Pay Off Your Tax Debt?
Apart from the above three options, there are few other ways to pay off your tax debt. Here are some of them.
You can take out a personal loan and consolidate your unsecured debts. You can use this loan to pay off your tax debt, credit card debt, utility bills, payday loans, and so on.
People can sell their unused stuff to generate free cash and pay off your tax debt.
You can request the IRS for a deferment until your financial situation becomes better. You have to pay off your tax debt eventually. But at least you will get some time to pay it off.
Conclusion on How to Pay Off Tax Debt and Reduce Stress
Tax debt can be tricky and risky at the same time. You should never ignore it. Consult a certified CPA to navigate the tax debt relief options. Be vigilant about the companies that promise to resolve your tax debts without reviewing your present financial situation. They charge advance fees and submit documentation, but your application gets rejected. Check out the client reviews of these companies before paying any fee to them. There is no point in wasting your money.
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Stacy Miller
Stacy B. Miller is a writer, blogger, and a content marketing enthusiast. Her blog vents out her opinions on debt, money and financial issues. Her articles have been published in various top-notch websites and she plans to write many more for her readers. You can connect with her on Facebook and Twitter.
Thanks for all this info!