A big wad of debt owed to the IRS can be a soul-crushing burden, but the worst thing you can do is ignore the problem. It can not go away; it depends on the level of debt you have, but it can be overwhelming, said Beverly Winstead, a tax attorney based in Laurel, Maryland. For some people,$ 10,000 in IRS debt can seem like$ 100,000 for someone in private practice, but you ca n't bury your head in the sand, she said. There are options to move in the right direction. The best way to resolve the issue is by filing our tax returns and a potentially longer-term plan to pay off back taxes owed. From Your Money: Is It Your Future? Did you get an email from the IRS that you owe?
Do n't panic! What are the best ways to get rid of debt and help my retirement plan?
Older workers with little to lose can pad their nest eggs with these moves The IRS will continue to collect penalties and charge interest on unpaid tax balances until they are settled.
In 2019, the service issued nearly 543,604 tax liens on property and placed 782,735 notices of levy to delinquent parties that garnish income from third taxpayers. The longer you leave a tax debt problem, the deeper the hole will get. Taxpayers with IRS debt need to deal with it sooner rather than later, as it can linger for years, said Tom Gibson, a CPA with Tax Saving Professionals in Vero Beach, Florida. Putting it off will only make it worse. Gibson suggests that taxpayers make resolving tax debt their top priority as far as managing their obligations- even trumping a home mortgage. The IRS can seize your home or your business assets, he points out. What do you do if you ca n't pay?
An ideally- especially business owners- option is to take out a bank loan or line of credit to cover what you owe. The interest may not be deductible, but it will almost certainly be lower than the effective rate charged by the IRS. Penalties on unpaid tax balances accrue at a rate of 0.5% per month. The IRS also charges interest on the balance on the balance at the rate of the federal short-term interest rate- currently 0% plus 3%. All of this equals a 9% obligation that will increase further if interest rates rise. A second option is to take out a loan from a qualified pension plan like 401 or an individual retirement account that you can pay back over time. You will miss out on the potential return of money, and there will be some interest due in replacing the funds, but again it will be much less than the carrying costs of debt with the IRS. Do not pull money from your pension plan; I think a lot of people pull it out as taxable distribution and that makes things much worse, said Gibson. If paying off the debt soon is not a viable option, taxpayers can set up an installment payment plan with the IRS of up to 72 months to address the issue. For balances of less than$ 10,000, you can find it yourself on the irs.gov website without revealing any financial information.
If the debt is more than that, you 'll have to submit annual income and expenses to the IRS. Winstead said that in a lot of instances, people can just turn it off on the IRS website, said Winstead. If it's too overwhelming, they should at least talk to a lawyer or tax representative about it. People who ca n't afford advice can get free consultation through organizations like Winstead, which helps the low-income taxpayer clinic with a free book for the University of Maryland. Taxpayers in really dire financial straits who feel they ca n't deal with a tax debt can present an offer in compromise to the IRS. It is essentially a plea for a reduction of the amount owed. Beware of companies that promise to solve tax debt for pennies on the dollar. It will take some pretty serious circumstances for the IRS to agree to a tax haircut on debt. Things like your lost medical expenses, a lost job or unemployed family members may qualify. However, if you still have a good income, chances are probably slim.
Gibson said the IRS wo n't compromise with a high-earning doctor or dentist, said the IRS. The IRS accepted 54,225 compromise offers from taxpayers in 2019 and received 17,890 of them according to IRS data. To make an offer, you have to be up-to date on your tax filings and have paid estimated taxes for the current year. The IRS is not very efficient, but its decision will be based on how exceptional it thinks your debt is and how real your circumstances are. At the end of the day, it will depend on how much money you have and how much equity and assets you own to pay off the debt, said Winstead. She suggested that now is the time to address the problem, since the IRS has been more lenient with taxpayers during the pandemic. That may not last; as we come out of this, I think they will go back to more normal collection tactics, said Winstead. If you have issues with the IRS, now is the time to take a step in the right direction.