Few people enjoy paying taxes, but it’s an unavoidable part of living in a society. Still, falling behind on taxes is a fairly common situation, with nearly 25 million Americans facing tax delinquency in 2019 and 2020. Between overdue taxes, penalties, and interest, these taxpayers owed the IRS more than $240 million.
While many taxpayers owe money to Uncle Sam, getting out of tax debt as soon as possible is critical. Delinquent taxes won’t simply go away but will instead compound until you’ve got a much bigger—and more expensive—problem on your hands.
Here’s a look at why delinquent taxes are such a big deal, what that owed balance can turn into, and how to get out tax debt once and for all.
In this article:
- Why it’s important to get out of tax debt
- How to prepare to get rid of tax debt
- Options for getting out of tax debt
- How long can tax debt last?
- Where to turn for help getting out of tax debt
Why it’s important to get out of tax debt
Any form of debt can be costly, whether you’re talking about credit card debt, mortgage debt, or even tax debt. Whenever money is owed to a creditor or lender, finance charges (interest) are typically added to the principal balance as payment for the convenience of borrowing that money.
As you pay off the money you owe, those interest charges will eat away at your payments. The longer you take to clear the balance, the more you’ll typically pay in interest, making the debt more costly.
However, tax debt takes this concept a few steps further.
See, while a credit card company or mortgage lender may charge you interest, they are alright with you owing them money. In fact, they expect it. As long as you’re making monthly payments as agreed, they will continue collecting interest charges without complaint.
The IRS (or state governments), however, are not too keen on delinquencies. They don’t expect you to fall behind on tax obligations at all—and if you do, there are repercussions.
If you are delinquent on your taxes, you’ll pay interest on the balance until it’s cleared. You’ll also pay penalty fees. If you don’t clear that debt quickly enough, the government can even seize your property.
Put simply, tax debt is no joke. Thankfully, there are immediate steps you can take if you’re wondering how to get out of tax debt as soon as possible.
How to prepare to get rid of tax debt
If you owe on your taxes or believe that you do, you should begin preparing to clear any existing debt.
If you aren’t sure how much you owe—or whether you owe at all—you can confirm your tax debt by visiting IRS.gov/account. There, you can see what you owe and the balance breakdown, view your current tax return, track up to 18 months of previous payments, and even schedule a new online payment.
You can request an IRS transcript by mail, too. Transcripts cover a single tax year, so they may not offer you the most up-to-date information on your balance, including fees and penalties.
If you are a business or filed your taxes using a form other than the 1040, you can also submit a Form 4506-T to get a transcript of a previous year’s return.
Tax debt can result from insufficient withholdings throughout the year, a failure to pay quarterly taxes (if self-employed), or even occurrences throughout the year that resulted in unexpected gains. If you believe that you owe because you didn’t file your taxes one year, you may want (and need) to complete that filing before you can accurately determine how much tax debt you’re actually in.
Options for getting out of tax debt
Once you’ve confirmed that you are indeed delinquent on your taxes, and you have an idea of what you owe to the IRS or your state government, it’s time to make a plan for getting out of debt.
Here are some ways to approach your tax debt and clear the balance in the fastest, easiest, and most cost-effective way.
Pay off the balance in full
The easiest way to get out of tax debt is simply to pay off what you owe in full. If you miscalculated your withholdings for the year, recognized certain gains, or something else, and you now realize you owe the IRS, making a full payment can be the easiest way to avoid fees and further issues.
However, this option may be easier said than done for many taxpayers. It usually only works for taxpayers who can afford to repay their balance right away and for whom the tax debt was merely a mistake.
If your outstanding tax debt was not an accident, it may not be possible for you to make a large payment all at once. In this case, you’ll need to formulate a plan to pay off the debt in a reasonable (but quick) way.
Set up a payment plan
The IRS does offer payment plans to eligible individuals who owe delinquent taxes. These payment plans can either be long-term or short-term, depending on how much you owe and whether you qualify.
Short-term payment plans are those lasting 180 days or less. They are available only to individuals who owe less than $100,000 total between delinquent taxes and any subsequent interest or penalties. Short-term installment plans have a $0 setup fee, but the balance does continue to accrue interest and penalties until it’s paid off.
Then, there are long-term installment plans, which are available to taxpayers who owe less than $50,000 combined. A long-term plan also requires you to have filed all necessary returns before approval.
With a long-term payment plan, you’ll pay your balance monthly through an automatic withdrawal or a non-direct debit. If you sign up for automatic withdrawal—required if you owe $25,000 or more—you’ll pay a $31 setup fee. For the non-direct debit payment option, your setup fee jumps to $130. Plus, you’ll be subject to processing fees if you pay with a credit card.
With a long-term plan, you’ll also continue accruing interest and penalties until the balance is cleared.
Offer in Compromise (OIC)
If you’re unable to pay your full tax debt amount—or if doing so would result in financial hardship—you may want to consider making an Offer in Compromise, or OIC. An OIC is essentially a plan to settle your tax debt with the IRS for less than you technically owe. You can pay this mutually agreed-upon amount as a lump sum payment or in monthly installments.
The IRS will consider many different factors when reviewing an OIC application. These can include your income, family size, monthly expenses, assets, and (frankly) your actual ability to pay. You can also check your eligibility ahead of time by visiting the IRS’s Offer in Compromise Pre-Qualifier.
OICs are not available to taxpayers who have an open bankruptcy proceeding in progress. Also, applications will not be approved if one has not filed all required returns or has not been making any required estimated tax payments.
Along with your OIC application, you’ll need to pay a non-refundable application fee of $205, as well as the initial payment for the OIC you are offering. Low-income taxpayers who qualify will not need to submit an application fee and are not required to send in their first payment.
How long can tax debt last?
An assessed IRS tax debt will expire after 10 years. This means that if no further action is taken, the government’s right to collect on that tax debt will expire a decade after it was first filed and assessed.
However, waiting 10 years for this statute of limitations to run out is never a good idea. This is because even though the Collection Statute Expiration Date (CSED) only lasts that long, the IRS seldom lets the debt sit untouched until the end. Instead, they will typically file a Notice of Federal Tax Lien concerning the debt, which can then turn into a levy.
A federal tax lien is the government’s official claim to your property—including assets such as your home, car, business, or even bank accounts—in response to a debt that you owe them. You will be unable to make certain moves with those assets (such as selling or refinancing your home) without the release of that lien. A lien can also make it difficult to take out new credit-based accounts, such as a home mortgage.
If a lien does not give the results the IRS wants, they may turn to a levy. Levies take the lien’s claim one step further and actually allow the government to seize your property to satisfy your tax debt. This means that it could come in and take money from your bank account, take possession of your home, or even garnish your paychecks until the tax debt is cleared.
Where to turn for help getting out of tax debt
Getting out of tax debt can feel overwhelming at times, and it may be difficult to know where to start. If you’re wondering how to get out of IRS tax debt on your own, the process can be even more daunting and may even leave room for errors.
Getting outside help—especially for a large or complex tax debt—can often be a wise move. There are many tax attorneys, specialists, and tax relief firms that can help you understand your debt and strategize ways to pay it off. Many of these specialists can also speak to the IRS on your behalf, saving you time and sparing you confusion along the way.
No matter which route you choose, it’s important to get out of tax debt as soon as you can. Whether you pay your balance in full, set up a payment plan, or offer to pay the IRS less than you owe, moving in the direction of a debt payoff is imperative, especially to avoid additional fees and penalties.
>> Read More: What is tax relief?