How to Reduce Old Tax Debt – Guest Post
When tax time rolls around, a lot of people run for cover. Going on the theory that if they can’t find you they’ll never get your money, you figure that if you simply hide until April 16th everything will be okay. Unfortunately the Internal Revenue Service doesn’t give up that easily. You’re on the books, and the books say you owe them money. They’re intent on collecting. So, okay, you’ll pay, grumbling and cursing all the way to the mailbox.
But what if you don’t have the money to pay your taxes on time? The same thing happened last year and you’re still carrying the old tax debt. Since you’ve figured out that the IRS isn’t going to simply go away it’s time to start looking for ways to get out from under the burden of unpaid taxes. How do you do that? What steps can you take to reduce old tax debt?
Contact the IRS
The first thing you should do is contact the Internal Revenue Service and let them know you’re aware of the debt and that you’d like to discuss options on paying it off. Although the IRS can be forceful and seemingly intolerant of you for not paying on time, they are likely to be less so if you approach them before it becomes necessary for them to take punitive action. Once the lines of communication are open there are basically four ways to approach alleviating old tax debt.
The first is an installment plan. This is probably the easiest plan, and the one the IRS would normally choose because it means you will be paying off the entire debt in a timely manner. The installment plan is simple, and easy to implement. You and the IRS work out an agreement whereby you make monthly payments until the debt is erased.
It works like any other payment plan. Interest and penalties are included in the payments, and a payoff date is set. If you continue to make the payments on time the debt will ultimately be paid off. The installment plan is the best way you and the IRS have of working together to solve the problem, so they’ll be more likely to accommodate you with this plan than any of the others.
Get Professional Help
The remaining three methods of reducing old tax debt are a bit more complicated. You may want to seek professional help in the form of an account or tax attorney to help you negotiate with the IRS on the following plans. Remember, the IRS simply wants what is owed. On the other hand, your intention is to eliminate the debt as quickly and painlessly as possible.
1. Partial Payment Installment Plan
This is similar to the installment plan except in certain cases the IRS may be willing to accept less than the amount owed in order to clear the books. Special circumstances could call for a reduction of the debt when they realize they may never collect unless they’re willing to bend a little. Once an amount, less than what’s actually owed, is agreed upon a payment plan is worked out and as with the regular installment plan, if you make your payments in full and on time the debt will eventually be paid off to the satisfaction of the IRS. Then you start over from square one.
2. Offer in Compromise
Comparable to a partial payment installment plan, an offer in compromise will probably contain stiffer penalties and higher payments. You may be required to pay the debt all at once in order to receive a reduction in tax liability. If a payment plan can be worked out it will mean foregoing any tax refund for the current year, your financial information will become a matter of public record, and the IRS gets unlimited access to your entire financial history. If you’re unable to make the payments, you’ll have to pay the entire amount you originally owed, plus interest and penalties. On the upside, if you make all the payments on time and in full, your tax debt will be eliminated and your credit rating will improve.
3. Not Currently Collectible
In the case of someone that is truly not able to pay off or reduce their tax debt, there is a way to have the debt delayed… maybe indefinitely. If you can prove you’re unable to pay at the present time, you can apply for not currently collectible status. This means the IRS agrees to not pursue the debt for a specified period of time in the hopes that you can start making money again and eventually eliminate the debt.
Although the debt doesn’t disappear it may help you get back on your feet again. One advantage of your tax debt being not currently collectible is that there is no actual limit on how long it can remain in effect. However you’ll still be required to keep up to date on current tax payments. In other words, if you owe taxes for 2009 and are considered not currently collectible, you are required to pay your 2010 and 2011 taxes on time. If you don’t, your not currently collectible status could be dropped and you’ll have to go on some sort of payment plan.
There is another, significantly less desirable method of reducing or eliminating old tax debt — bankruptcy. Of course this should be the last option you consider. The lasting ramifications of bankruptcy will follow you for a long, long time. It’s far better to find a way to pay your taxes.
Guest post from Bailey Harris. Bailey writes about home insurance and related topics for www.homeinsurance.org.