If you’re struggling to dig yourself out of tax debt, you’re not alone.
According to the IRS, nearly 860,000 people were delinquent in paying their taxes in 2017. And the total tax debt totaled $44.7 billion.
Carrying debt doesn’t just put a strain on your financial life, the stress can affect other aspects, including your physical and mental wellbeing.
If you’re looking for ways to find some tax debt relief, this article is certainly going to help. So, continue reading for a guide on clearing your tax debt once and for all.
What is Tax Debt?
Tax debt is considered to be any amount of taxes you still owe after the IRS’ filing deadline. Even if you filed your return prior to the deadline and made a partial payment, the balance you’re carrying will still qualify as tax debt.
How Does Tax Debt Increase?
Think about the way interest charges are added to your credit card when the balance isn’t paid in full. The balance of your tax debt can grow in a similar way.
With tax debt, you are charged additional interest and penalty fees for nonpayment.
On average, the IRS will charge a penalty that is .05% of your total tax debt. But the amount can vary with the highest possible percentage being 25%.
It is also important to understand that the first penalty charge you receive is going to be the lowest.
This is because your penalty and interest fees will always be a percentage of your total balance due. And if your balance is growing as a result of the fees, the additional amount you will be charged each month will increase too.
With that said, if you qualify, the IRS may reduce the number of penalties you receive. However, they will never make such a change regarding interest.
Penalty Fee Forgiveness
In order to have penalties reduced from your tax debt, you will need to prove “reasonable cause” to the IRS for your inability to pay.
Some circumstances the IRS has approved in this instance include a death in the family, divorce, theft, and natural disasters. Reasonable cause for non-payment has to be an unpredictable crisis that was out of your range of control in order for the IRS to reduce or forgive your penalty fees.
Simple Tips to Get Some Tax Debt Relief
Your tax debt doesn’t have to continue casting a dark cloud over your life! Here are some highly effective ways to work through it.
1. Find Out if You Qualify for Innocent Spouse Relief
If you’re married or even legally separated, you can still be responsible for tax debt or incorrect information found on a tax return. But there are still options for you.
If your partner did something like failing to report taxable income or took incorrect tax deductions, you can be qualified for dismissal from any shared responsibility.
To become eligible, you will have to prove that you were either misled or simply didn’t know about the taxes being filed incorrectly.
Keep in mind that there is typically a two-year window from the time the IRS initially makes contact about the unpaid taxes to the time you’re able to apply for innocent spouse relief.
You may qualify for equitable tax relief if you don’t qualify for innocent spouse relief.
This option is available if you’re able to prove the inaccurate details on your joint tax return was your spouse’s fault. This is also a possibility when the tax return is correct, but it wasn’t paid on time.
2. Learn the Statute of Limitations
If you’re carrying tax debt from previous years, it’s important to understand the statute of limitations. The IRS has 10 years to collect on taxes, interest fees, and penalties too.
If your taxes are more than 10 years old, you might be able to resolve your tax debt without paying anything at all.
If you are nearing the 10-year mark, a tax attorney can help you file the necessary paperwork to put a pause on tax liens, seizures, and levies before the statute of limitation takes effect. Doing so will allow you to hold off until the statute period is over.
This way, the IRS cannot collect on your past due taxes.
With that said, this doesn’t come without risks. If you don’t qualify, you can end up having to pay additional interest and penalties.
3. Have Your Taxes Marked ‘Not Collectible’
If you can’t afford to pay your taxes, you can place a temporary hold on the balance owed. The IRS can mark your taxes as “not collectible” if you qualify, this will pause the payment temporarily.
This option works only for as long you’re not able to pay. It also stops wage garnishments, tax levies, and liens on property for a small window of time.
4. Enlist Some Professional Help
If you owe back taxes, the IRS can process a bank levy on your checking and savings accounts. This gives them permission to remove all the funds that are in your accounts up to the amount that is due.
You can enlist the help of a third-party agency to assist you with this complicated process. You can check out this site for more information.
Bankruptcy is an absolute last resort option for taxpayers who cannot pay their balances. And with it come some consequences.
For example, your credit score and suffer significantly and you will certainly have trouble obtaining a loan in the future. Additionally, you might have to liquidate your assets in order to pay your creditors.
6. Consider an Installment Plan
You may not have the money available to pay your tax debt in one lump sum and that’s okay. An installment plan can help you pay down your debt with monthly payments to the IRS.
To qualify, you should:
- Be up to date on all your filings
- Have state income taxes that are mostly paid in full
- Make your payments on time each month
You will also need to keep in mind that the IRS will not qualify you to for an installment plan if you are behind by $50,000 or more.
With the help of a finance professional, installment plans, and even the IRS’ own forgiveness programs, tax debt relief isn’t impossible to come by.
The first step is to analyze your tax situation and see where you can possibly qualify for a break.
If you need more advice on cutting expenses to make life easier, follow our blog!