Debt Consolidation

5 Ways to Pay Off Tax Debt

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For some people, tax season is something they look forward to if they expect to have a sizeable tax refund coming their way. But for many others, it can bring on feelings of dread, from the tedious task of actually filing to finding out what you owe.

Tax season can be especially stressful if you’re experiencing some sort of financial strain and you won’t be able to easily pay off what you owe right away. Fortunately, there are various solutions for paying off your tax debt without getting yourself into any more trouble. Read to learn about a few of these options, from loan options to installment agreements and payment plans with the IRS.

5 options to pay off tax debt

If you’re actually able to pay off your owings in full, you can simply make a payment with a debit or credit card or electronic funds transfer online on the IRS website. But if you know right off the bat that you can’t afford to pay off all that you owe right now, it’s wise to figure out exactly how much you are able to initially pay off.

From there, you can learn about these five options to determine which may suit your financial situation:

IRS short-term payment plan

Your individual situation will ultimately determine whether or not you qualify for a payment plan, but if you owe less than $100,000 in combined tax, penalties and interest, you’ll likely qualify for a short-term payment plan, in which you’ll be expected to pay your taxes in 120 days or less.

To apply, you’ll need to provide details such as your name and address as they appeared on your last tax return, date of birth, Social Security number, email address and bank account information. You can apply online, by mail, over the phone or in person, though fees may be higher if you choose any of the last three options.

Installment agreement

Another option for paying off your tax debt is a long-term payment plan, also known as an installment agreement. This option is aimed at people who will likely need several months or even years to pay off their tax debt in small amounts. To qualify, you’ll need to owe $50,000 or less in combined tax, penalties and interest, and have filed all required returns. This option will allow you to pay off your tax debt in 120 days or longer.

As with the short-term option, to apply for an installment agreement you’ll need to provide details such as your name and address as they appeared on your last tax return, date of birth, Social Security number, email address and bank account information. You can apply online, by mail, over the phone or in person, though, again, keep in mind that fees may be higher if you choose not to apply online.

Offer in compromise

If you’ve filed your tax returns and the IRS has determined that you cannot afford to pay all of what you owe, you may be eligible for an offer in compromise, an option that allows you settle your debt for less than you owe.

In addition to your ability to pay, other factors that will determine whether or not you qualify include your income, expenses and asset equity. The IRS recommends exploring all other payment options before working with a qualified tax professional to apply for this option.

Request ‘Currently Not Collectible’ status

This option is reserved for people who can’t pay their taxes and their living expenses without it causing financial hardship. If the IRS agrees that this applies to your financial situation, it will place your account in “Currently Not Collectible” status.

You may be required to file any past due tax returns before the IRS will apply this status to your account. It won’t attempt to collect payments from you during this time, but the debt will stay on your record, with penalties and interest continuing to increase. In the meantime, the IRS will also continue to review your income every year to see if your situation has improved.

Personal loan

A personal loan can help you pay off your taxes over a longer repayment term. An unsecured personal loan can be a viable option because it doesn’t require you to put up any collateral to receive loan funds. Terms are usually short (about two to five years) and loan amounts are flexible, though dependent on the lender’s terms.

However, whether or not you qualify will depend on your creditworthiness, and interest rates can prove to be quite high because of the increased risk to the lender. It’s worth noting, too, that this option will lead you to essentially pay interest on the taxes you’re repaying. That could make repayment more expensive in the long term.

Be sure to explore lenders and their terms, fees and conditions before applying for a personal loan.

What happens if you don’t immediately repay tax debt?

If you don’t immediately pay your taxes in full when you file your return, the IRS will send you a bill for the amount you owe, beginning the collections process. This will continue until you’ve paid off your debts or have satisfied the terms of an agreement, with interest and potential penalties growing all the while.

In general, the statute of limitations for tax debt is 10 years from the date on your first bill, meaning that from there, the IRS must stop its collection efforts. However, this can vary depending on factors, such as extensions and payment agreements, which is why it might be best to consult with a tax professional before choosing your course of action.

Bottom line

Whatever you do, don’t skip filing altogether, no matter how stressed you might be about what you owe. The IRS will impose two separate penalties for not filing and for not paying on time, which would obviously be a worse predicament than what you may owe alone.  Similarly, don’t ignore letters and other communications from the IRS, as it could lead to a Notice of Federal Tax Lien filed against your property, meaning the IRS collect some of your assets to sell to satisfy your debt.


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