Tax debt can be an overwhelming burden that keeps you awake at night. If you’re struggling with back taxes, you’re not alone. Many people find themselves in a similar predicament due to a variety of circumstances such as job loss, health issues, or simply falling behind on payments. Fortunately, there are ways to deal with this challenge.
Here are five practical ways you can explore to get some relief from your tax debt.
Apply For An IRS Debt Forgiveness Program
The IRS debt forgiveness program allows you to negotiate down your tax debt under certain circumstances. The ‘Offer in Compromise (OIC) is one such program. It enables you to settle your tax debt for less than the full amount you owe if you can prove that paying in full would cause financial hardship. The IRS considers your income, expenses, asset equity, and ability to pay when evaluating your OIC application. It’s a complex process and may require professional help, but if successful, it can significantly reduce your tax debt.
Set Up An Installment Agreement
If you can’t pay your tax debt in full but can afford to make monthly payments, you may qualify for an installment agreement. This is essentially a payment plan that allows you to pay off your debt over time, reducing financial stress. You will still accrue interest and penalties until the debt is paid in full, but an installment agreement can prevent more severe collection actions like levies or liens.
Seek A Temporary Delay
The IRS may temporarily delay collection actions if you’re facing significant financial hardship, such as unemployment or severe illness.
This delay, known as ‘Currently Not Collectible’ status, doesn’t erase your tax debt, but it can give you some breathing room until your financial situation improves. However, interest and late penalties continue to accrue during this period.
File For Bankruptcy
Filing for bankruptcy should be your last resort, given its long-lasting impact on your credit. However, in some cases, it might be the best option.
Chapter 7 bankruptcy can discharge certain tax debts, and Chapter 13 bankruptcy can allow you to repay your debt over 3-5 years. It’s critical to consult with a bankruptcy attorney to understand the implications and eligibility requirements.
Innocent Spouse Relief
If your tax debt has been accrued due to a jointly filed tax return, there is a particular relief avenue you might be able to leverage, known as ‘Innocent Spouse Relief’. This provision is specially designed for individuals who were oblivious to their spouse’s erroneous tax filing that eventually led to the onset of the tax debt.
The principle behind this relief is quite straightforward. In many relationships, one spouse may take responsibility for filing taxes, while the other might not be involved in the process or fully aware of the tax details. If mistakes were made during the filing, leading to a substantial tax bill, it seems unfair to hold the uninformed spouse responsible for the debt. This is where the innocent spouse’s relief comes into play.
However, obtaining innocent spouse relief isn’t a simple process; it requires a detailed application where you must convincingly demonstrate to the IRS that you were unaware of the tax errors made by your spouse when you signed the joint return. It’s also crucial to note that this relief applies to individual tax items of the spouse that were incorrectly reported on the joint return. This relief doesn’t apply to correct tax reported but not paid.
In Conclusion
Tax debt can feel like an insurmountable hurdle, but there are resources available to help you manage and even reduce your debt. From the IRS debt forgiveness program to installment agreements, temporary delays, bankruptcy, and innocent spouse relief, you have options to navigate your tax debt. Remember, it’s essential to seek advice from tax professionals who can guide you through these processes and help you make the best decision for your situation. With patience and persistence, you can take control of your tax debt and work towards financial freedom.