By Kari Johnson on January 11, 2011
.jpg.aspx?width=75&height=75) If you owe money on your taxes, there are some things you can do to manage it, but the way you handle the tax debt is different than how you deal with other debt.
With tax debt, you can either handle it yourself or hire a professional to deal with it for you. If you do hire a professional, be sure it is a Certified Public Accountant, Enrolled Agent, or tax attorney.
The first thing he or she will do, that you could do yourself, is to review your original tax returns. If there are errors or deductions you originally overlooked, you may owe less than you think.
Once you have established how much you owe to the IRS, you can begin to do something about it. If you can afford to pay it, it obviously is not a problem. However, if you can’t pay it right away, there are other ways to deal with the debt.
One method of action is to deal with it at face value, in an installment agreement with the IRS. They will give you a plan where you can pay the tax debt over a period of months. However, this will include a 5% interest rate and a penalty of up to 1% for not paying it all at once. There is also a user fee of $105. This being said, the IRS itself suggests you may be better off taking out a loan to pay the tax debt off in one lump sum and having to pay the loan back every month than pay the IRS with the installment plan.
Another plan of action that the IRS provides is a temporary delay of collection or a significant hardship consideration. This will postpone your payment for some time while you get your finances in order, but will incur interest and penalty fees when you are asked to pay it. In the end, this will turn out more expensive, but if all you need is temporary relief, it may be an option.
To reduce your tax debt would require an “offer in compromise.” To qualify, you would have to prove that you cannot make the payment, that you may not be liable for the payment, or that there are extenuating circumstances where you could make the payment and are liable but there is something else to be considered.
There is a $150 application fee for an offer in compromise. If the debt is reduced, the taxpayer will need to pay it in one lump sum or in a short series of installments.
The final option is, of course, bankruptcy, but this is a drastic decision that can ruin your credit and may not lower your tax obligations. If at all possible, it should probably be avoided. Whether using a professional or doing it yourself, these are other options that may make your tax debt manageable.
Note: When asking a third party for help negotiating tax debt reductions, make sure that you avoid tax relief scams. |