How To Finally Get Rid of Your Back Taxes
Back taxes are amounts that taxpayers owe the IRS from prior years. Of all of the types of debt you may have, back taxes rank among the worst — and you should work on paying them off as soon as possible.
Find Out: Medical Expenses You Can Deduct From Your Taxes
More: 3 Signs You’re Serious About Raising Your Credit Score
For starters, when you don’t pay the IRS on time, you’ll owe additional interest and penalties. And if things get really bad, the IRS may even garnish your wages or put a lien on your personal property, like your home. To avoid these worst-case scenarios, take a look at these strategies you can employ to get rid of your back taxes once and for all.
Rework Your Budget
If the amount you owe the IRS is not too large, you may be able to get out of your tax debt simply by reworking your budget. Even the tightest budgets typically have some allowance for discretionary expenses, and now is the time you might have to make some real-life sacrifices in order to get out from under your tax debt.
If you have $300 per month set aside for eating out and entertainment, for example, you might have to divert that full amount toward your tax debt for a few months to get it paid off. It may not be fun, but consider it a short-term sacrifice to avoid additional penalties and interest. And if you don’t have a budget at all, let this be a wake-up call that it is time to draft one.
Set Up an IRS Payment Plan
If you can’t afford to pay your taxes in full, don’t panic. In most cases, the IRS will allow you to set up a formal installment plan that will prevent any type of collection activity while you’re making payments in good faith. The other option — simply not paying at all — will only lead to legal action against your bank accounts and other assets.
You can apply for a payment plan online directly with the IRS. You can set up electronic payments via the Electronic Federal Tax Payment System (EFTPS) or you can have payments directly debited from your checking or savings account. Note that if your outstanding debt is more than $25,000, you’ll have to pay via direct debit.
Take Our Poll: What Do You Plan To Use Your Tax Refund For?
If you can pay off your taxes within 180 days, you won’t even have to pay a setup fee to establish your payment plan. However, you’ll still face accrued interest and penalties on the amount you haven’t paid off. Thus, even if you set up a payment plan, it’s in your best interest to pay off that debt as soon as possible.
If your tax debt is so large that you can’t pay it off in 180 days, you’ll have to apply for a long-term installment plan. The fee to apply for an installment plan online is $31. If you apply in-person, by phone or mail, your setup fee will be $107. As with short-term payment plans, penalties and interest continue to accrue until you satisfy your debt in full.
Submit an ‘Offer in Compromise’
If you can convince the IRS that even paying your taxes on an installment plan would create an undue financial hardship, you may be able to reach an “offer in compromise.” Under this strategy, the IRS agrees to settle your outstanding tax debt for less than the total amount you owe — and sometimes, significantly less.
While this can seem like the best of all options, the reality is that the IRS doesn’t accept “offers in compromise” all that often. According to the IRS itself, it will approve offers in compromise “when the amount you offer represents the most we can expect to collect within a reasonable period of time.” However, this generally only relates to individuals with no income and few assets. If you have steady employment and/or valuable assets, the IRS will likely push you toward an installment plan, even if it takes years for it to get paid back in full.
To determine whether or not it will accept an offer in compromise, the IRS utilizes a metric known as the “reasonable collection potential,” or RCP. The IRS measures your RCP based on both your anticipated future income and your current assets, from your bank accounts and real property to your automobiles and other valuables. It won’t generally accept your offer in compromise unless it’s for an amount greater than your RCP.
More From GOBankingRates
- The 15 Biggest Bank Failures in US History
- Financial Insight in Your Inbox: Sign Up for GBR's Daily Newsletter
- Maximize your savings with these 3 expert tips
- Take Our Poll: How Do You File Your Taxes?
