How to Get Out of Tax Debt

Taxes are an unavoidable part of living in a society. Still, falling behind on taxes isn’t uncommon. The IRS collected over $98.4 billion in unpaid taxes from returns filed with additional tax due for the 2022 fiscal year, netting about $58.8 billion after adjusting for credit transfers.

If you owe money to Uncle Sam, getting out of tax debt as soon as possible is critical. Delinquent taxes won’t go away. They’ll compound until you have 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 of tax debt once and for all.

Why it’s important to get out of tax debt

Here’s what you need to understand about tax debt.

The cost of debt

• What makes debt expensive: Debt, including credit card, mortgage, or tax debt, accrues finance charges or interest on top of the principal amount. This interest compensates the lender for the opportunity to borrow money.

The impact of interest charges

• How interest affects payments: As you work to pay off your debt, interest charges consume a portion of your payments. The longer the debt remains unpaid, the more interest accumulates, thereby increasing the total cost of the debt.

The unique case of tax debt

• Tax debt is different: Tax debt is even more serious than other types of debt. Credit card companies and mortgage lenders expect to earn interest over time and are OK with extended repayment periods, but the IRS and state governments don’t operate under the same expectations.

Consequences of falling behind on taxes

• Expectations from the IRS: Unlike other creditors, the IRS does not anticipate late payments or take them lightly. Falling behind on tax obligations leads to significant repercussions.
  • Interest and penalties: Delinquency on taxes results in interest charges on the outstanding balance, as well as penalty fees.
  • Severe measures: If the debt remains unpaid for too long, the government has the authority to seize assets.

Take action against tax debt

• Immediate steps to resolve tax debt: Recognizing the severity of tax debt is crucial. For those looking to navigate out of tax debt, it’s important to explore available options and take immediate steps toward resolution.

Check out our detailed guidance on resolving tax debt, including potential tax debt forgiveness.

How to prepare to get rid of tax debt

Follow these five steps as you prepare to rid yourself of your tax debt.

1. Acknowledge the debt:
   • If you owe taxes or believe you might, the first step is acknowledging the need to address any outstanding tax debt.
2. Verify your tax debt:
   • Visit the IRS website to confirm how much you owe. This site allows you to view your balance, see a breakdown of what you owe, view your most recent tax return, track previous payments up to 18 months, and schedule new online payments.
3. Request an IRS transcript by mail:
   • For a detailed view of a single tax year, you can request an IRS transcript. Transcripts may not reflect the most current balance, including any fees and penalties.
4. Use Form 4506-T for specific cases:
   • Businesses or individuals who filed taxes using a form other than the 1040 can submit a Form 4506-T to obtain a transcript of a previous year’s return. This is especially useful for getting detailed information for specific tax years.
5. Understand the causes of your tax debt:
   • Tax debt can arise from various situations, such as insufficient withholdings, not paying quarterly taxes (if you’re self-employed), or unexpected financial gains throughout the year. If your debt is due to unfiled taxes for a particular year, completing that year’s tax filing is essential for determining the total amount of tax debt accurately.

Options for getting out of tax debt

Once you’ve confirmed you’re delinquent on your taxes and have an idea of your tax liability to the IRS or your state government, it’s time to make a plan for getting out of debt.

Here are three ways to approach your tax debt and clear the balance in the fastest, easiest, and most cost-effective way:

• Pay the balance in full
• Set up a payment plan
• Offer in compromise

Pay off the balance in full

Here’s what you need to know about this option.

• Easiest solution: Paying off what you owe in full is the simplest way to clear tax debt. This approach is best if the debt resulted from a miscalculation or an oversight and you have the means to settle it immediately.
• Considerations for taxpayers:
  • This option suits those who can afford to repay their balance right away.
  • If the debt was not due to an accident, a large immediate payment might not be feasible. In this case, a structured repayment plan may be best.

Set up a payment plan

The IRS offers the option to set up payment plans. These can be long-term or short-term.

• Short-term plans:
  • For debts of less than $100,000 including taxes, interest, and penalties.
  • Last 180 days or less with a $0 setup fee, but interest and penalties continue to accrue.
• Long-term plans:
  • Available for taxpayers owing less than $50,000.
  • Requires filing all necessary returns for approval.
  • Make monthly payments via automatic withdrawal (with a $31 setup fee for debts over $25,000) or non-direct debit (with a $130 setup fee). Credit card payments incur additional processing fees.
  • Interest and penalties accrue until the debt is paid in full.

Offer in compromise (OIC)

Here’s more about an OIC.

• For significant financial hardship: An OIC allows you to settle your tax debt for less than the full amount owed, either in a lump sum or through installment payments.
• Eligibility and considerations:
  • Considers income, family size, expenses, and assets.
  • Taxpayers with open bankruptcy proceedings are ineligible.
  • All required returns must be filed, and any required estimated tax payments made for OIC consideration.
• Application requirements:
  • Nonrefundable $205 application fee and the initial OIC payment are required upon application.
  • Low-income taxpayers may be exempt from the application fee and initial payment.

Visit the IRS’s Offer in Compromise Prequalifier tool to assess your eligibility before applying.

How long can tax debt last?

Here’s what you need to know about how long tax debt can last

IRS tax debt expiration

• 10-year limit: IRS tax debt expires 10 years after it’s assessed, ending the government’s right to collect.

Why you shouldn’t wait

• Active collection: The IRS often takes action before the Collection Statute Expiration Date (CSED) by filing a Notice of Federal Tax Lien, potentially leading to a levy.

Federal tax lien implications

• Government claim on property: A lien affects assets such as homes, cars, businesses, or bank accounts, restricting sale or refinancing and impacting credit.

From lien to levy

• Seizure of property: If a lien doesn’t resolve the debt, the IRS may escalate to a levy, seizing assets to satisfy the tax debt.

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. Many tax attorneys, specialists, and tax relief firms 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?