How to Minimize Tax Debt

The idea of having tax debt is a scary one. For many, the last think they want is the IRS on their tail. If you have tax debt, your best bet is to find a way to get rid of it as fast as you can. Here are a few options to help you minimize your tax debt.

Ask for an installment agreement

One option you have is to ask the IRS for an installment agreement if your tax debt is $10,000 or less. Coming in the form of a monthly payment, you may qualify if:

1. You haven’t filed or paid late in five years
2. Have filed all of your tax returns
3. Will be able to pay off your balance in 36 months or less
4. Have had no installment agreement in the past five years
5. Agree to file on time and pay on time for future tax years

Ask for a partial payment installment agreement

Another option is to ask for a long-term payment plan, which allows you to pay off your debt at a reduced dollar amount. This option is usually requires that you write a letter to the IRS to request this type of agreement. Here’s some good advice on how you can get this done.

Get a “Not Currently Collectible” agreement

Getting this type of agreement means that you have no ability to pay your tax debt at the time that the IRS is trying to collect. If the IRS receives evidence that you have no ability to pay (usually by submitting the Form 433-F (Collection Information Statement), they will stop all collection activities.

It’s also good to know that while your debt is in not collectible status, your 10-year statute of limitations on tax debt is still in effect, meaning that your tax debt could expire if the 10 years runs out.

Try an “Offer in Compromise”

The Offer in Compromise is similar to a partial payment installment agreement in that it is an attempt to settle your debt for less; however, with the Offer in Compromise you pay the debt in full, rather than in installments.

To get this done, you’ll need a Form 656 and Form 433-A.

Last Resort: File Bankruptcy

If your debt is too much to bear and the above options haven’t worked for you, you may be able to file bankruptcy to discharge your tax debts. However, while the Chapter 7 (complete liquidation of debt) or Chapter 13 (repayment agreement) may be available, beware that you will have to see a credit counselor first to determine that your debt is unmanageable. If it isn’t, you will be responsible for the debt without a bankruptcy.

It’s good to know that there are options available to help you reduce or completely pay off your tax debt. Owing tax debt is something that could haunt you for years to come, which is why it’s important to communicate with tax professionals and/or the IRS as soon as you realize it’s a problem for you. This way, you can work out options to get it pay down and off of your plate until the next tax season.