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MoneyWatch: Managing Your Money
By Angelica Leicht
Edited By Matt Richardson
/ CBS News
Filing taxes is an annual obligation for most people, yet it can be a daunting task despite being a regular financial responsibility. The process becomes even more complex for those with multiple income streams, adding layers of complication to an already challenging endeavor.
The stress of tax filing is often compounded by potential financial burdens. Unexpectedly owing money to the Internal Revenue Service (IRS) can catch even the most diligent taxpayers off guard, regardless of how carefully they've managed their withholdings and tax-related matters. Such unforeseen tax debts can significantly impact one's financial stability, especially if unprepared for this additional expense. It's crucial to remember that the IRS takes a serious stance on collecting tax payments.
However, taxpayers facing IRS debt need not despair. Various options exist to address outstanding tax obligations and regain financial footing. For those unable to immediately pay their tax debt in full, several alternative solutions may be available. These alternatives can be tailored to individual circ*mstances, offering potential pathways to resolve tax issues and move toward financial stability.
How to settle your IRS tax debt
If you need to settle your IRS tax debt, you have a few different options, including:
Tax debt relief
Utilizing a tax debt relief or tax settlement service can be a lifesaver for those struggling to pay off their IRS obligations. This option involves utilizing a private tax relief service or tax relief company to reduce or eliminate your tax debt or help negotiate a repayment plan with the IRS. In other words, this type of program is designed to alleviate the burden of your tax debt and make repayment more manageable.
And, there are a number of tax deductions and credits available, and not all of them apply to every situation. That factor, coupled with the sheer number of options for credits and deductions, can also make it a challenging landscape to navigate — and it can be tough to know how and when the deductions and credits apply.
So, to negotiate a beneficial payment plan, it can make sense to work with a tax relief company to better navigate the process. Keep in mind, though, that the IRS is generally more inclined to consider this option if there is doubt about the collectibility of the full debt.
Find out more about your tax debt relief options here.
Offer in compromise
You also have the option to try and settle your tax debt with an offer in compromise, which is a program that allows eligible taxpayers to settle their debt for less than the full amount owed. The IRS assesses your ability to pay based on your income, expenses, assets and overall financial situation.
If it's determined that paying the full amount would create undue hardship, the IRS may accept a reduced sum as payment in full. This option is ideal for those facing significant financial hardship and that can prove their inability to pay the full debt.
Installment agreement
If you can't afford to make a lump sum payment, an installment agreement directly with the IRS may be a practical solution. This arrangement allows you to pay off your tax debt in manageable monthly installments. While interest and penalties may still apply, the installment agreement provides a structured and realistic way to settle your debt without putting excessive strain on your finances.
Temporary delay
In some cases, the IRS may grant a temporary delay in collection efforts if you're facing significant financial hardship. This option doesn't eliminate your debt — but it does provide a brief reprieve during which the IRS will refrain from collection actions. It's crucial to communicate openly with the IRS and provide documentation supporting your financial hardship to qualify for this temporary delay.
Penalty abatement
Or, if you can demonstrate reasonable cause for the failure to pay your tax debt on time, the IRS might consider a penalty abatement. This doesn't reduce the actual tax debt but eliminates or reduces penalties associated with late payment. Valid reasons for penalty abatement include serious illness, natural disasters or other extraordinary circ*mstances.
DIY debt settlement
Negotiating a settlement directly with the IRS may also be an option in certain situations. This involves proposing a lump sum payment that is less than the total amount owed. Keep in mind that the IRS is generally more inclined to consider this option if there is doubt about the collectibility of the full debt.
The bottom line
Dealing with IRS tax debt can be a stressful experience, but understanding your options is the first step toward financial recovery. But remember, no matter what option you choose, communication with the IRS is key – so be sure to keep them informed about your circ*mstances to help you find the best solution to settle your tax debt and regain control of your financial future.
Angelica Leicht
Angelica Leicht is senior editor for Managing Your Money, where she writes and edits articles on a range of personal finance topics. Angelica previously held editing roles at The Simple Dollar, Interest, HousingWire and other financial publications.
