How to Get Out of Tax Debt

May 8, 2020 | by Jacob Hamilton

how to get out of tax debt

Tax season might be welcomed by those who expect refunds, but anyone who thinks they’ll owe money is probably less excited about filing. If you file your taxes—which you should always do, no matter what—and end up with a significant amount of tax debt, you need to know what your options are for dealing with it.

Start by learning more about your tax debt, and then find out how you can settle it, and what can happen if you don’t.

Find Out Why You Have Tax Debt

When the IRS notifies you that you have unpaid tax debt, it’s important that you learn the reason why you have tax debt. Did you underpay? Is there a mistake on your return? Does the IRS want to change your taxes? Call the number on your notice or letter and get more information if you don’t fully understand the situation.

Doing this can help you in two ways:

  1. If you notice any mistakes, you can get them corrected.
  2. You can hopefully learn from your experience and get better results in the future. For example, when you’re doing your taxes, maybe you need to claim different deductions, or maybe you need to review your filing status.
  3. Once you have a better grasp of the issue, you can move forward with settling your debt.

taxt irs

Ways You Can Settle Your Tax Debt With the IRS

There are a number of ways you can partially or fully settle your tax debt with the IRS, from installment agreements to abatements. Take a look at each of these methods, and consider which one sounds like it could work for you.

Installment Agreement

There are a few different options when it comes to installment agreements (which are also referred to as payment plans). For example:

  • If you qualify for a streamlined installment agreement, which means you owe $100,000 or less, the IRS won’t require verification of your financial situation. This kind of an agreement gives you up to six years to complete your payments.
  • If you owe $10,000 or less and meet other criteria, you qualify for a guaranteed installment agreement, which gives you up to three years to settle your debt. In addition, the IRS won’t file tax liens or levies against you for outstanding taxes due.

The most important part about installment agreements is that you must always make your minimum payments. For streamlined installment agreements, your minimum can’t be less than your total tax debt divided by 72 months (so, if you owe $36,000, that means a minimum of $500/month). You can always pay more than this amount if you want to, but you certainly don’t have to.

Partial Payment Installment Agreement

If you can’t afford the minimum payment, you can request a partial payment installment agreement (PPIA). The IRS will want to know the state of your finances, and they may require you to use equity in assets to help make your payments.

This kind of agreement isn’t permanent, and it allows your finances to be reviewed and potentially modified by the IRS every two years. This distinguishes it from an offer in compromise, which we’ll discuss next.

Offer in Compromise

An offer in compromise (OIC) also lets you settle your debt for less than you owe, but it’s more final than a PPIA. Once you and the IRS come to an agreement on how much you’re going to pay and when, the matter is settled, regardless of what happens in the future.

However, it’s much harder to be approved for an OIC, and that makes it less appealing to some people. You may still want to try, if you think it would work for you.

Deferment

When you can’t pay off any part of your tax debt, you can ask the IRS to temporarily delay collection. The debt doesn’t disappear—it will actually increase due to penalties and interest—and when your financial situation is better, you’ll need to make payments. But a deferment might be enough to get you back on your feet before you handle your tax debt.

First-Time Abatement

If you’ve been a compliant taxpayer up till now, a first-time abatement (FTA) can save you from your first penalty for not filing, not paying on time or not depositing your money correctly (and these penalties can be steep). Just remember that you’ll need to show proof of these things:

  • You’ve filed all your returns.
  • You’ve never gotten a penalty before.
  • You’ve paid all your taxes or you have a plan in place to do so.

Reasonable Cause Penalty Abatement

A penalty abatement for reasonable cause can be helpful if you’re experiencing a specific kind of difficulty. With this kind of abatement, the IRS might agree to remove a tax penalty if you can show that you had a good reason for earning that penalty. For example:

  • If you couldn’t access records you needed and that stopped you from being able to file
  • If a natural disaster made it impossible for you to pay what you owed payment in some way

If your situation sounds similar to any of these, you might want to talk to a tax adviser to find out if you qualify for a penalty abatement.

Statute of Limitations on Tax Debt—Collection Statute Expiration Date

The IRS can only collect on any tax debt until its Collection Statute Expiration Date (CSED), which is 10 years from the penalty assessment date. There are ways that the CSED can be extended, but once it’s expired, the IRS has to stop trying to collect on the debt.

A pro tip from the IRS: be aware of any CSEDs on your accounts and making sure they’re accurate to protect your rights as a taxpayer.

What Happens If You Don’t Pay Your Tax Debt

If you filed your taxes but didn’t or couldn’t pay your tax debt, you won’t go to jail—so that’s one thing you don’t have to worry about, at least. But tax liens and levies are a different story.

tax lien quote

Tax Liens

If the IRS has notified you about your tax debt and you still haven’t paid it off (or asked about something like an installment agreement), they can file a federal tax lien. This means that anyone can see that the government has a right to your assets (your house, your car, your business) because of your debt.

Luckily, as of April 2018, tax liens don’t show up on your credit report anymore, and they don’t affect your credit score. You should still try to avoid liens if you can, but if you can’t, fully settle your debt to get any liens removed.

Tax Levy

A levy is the next step after a lien. With a levy, the IRS can take your assets—usually money, because that’s easier to seize than physical property—in exchange for your debt. They might do this by taking money from your work wages or your bank account, for example.

When you’re already strapped for cash, a levy can stop you from making other payments, so it’s in your best interest to agree to a payment plan with the IRS so the levy can stop. Note that a levy doesn’t directly affect your credit, but if it affects the rest of your finances enough, your credit could be hurt indirectly. You’ll get at least 30 days’ notice before the levy begins, so you have a chance to respond before the IRS starts taking your money.

Tax Debt Help

Dealing with tax debt can be frustrating and confusing, but there is a light at the end of the tunnel. Focus on taking these five steps to help you get there:

  1. File your taxes, no matter what.
  2. Understand why you have tax debt.
  3. Arrange a payment plan with the IRS.
  4. Know your CSED and make sure it’s accurate.
  5. Avoid liens and levies as much as possible.

And when you need more support, there are always tax pros who can help you with all the confusing jargon and paperwork.

Death and taxes might be certainties, but no one ever said anything about tax debt. Start getting out of debt today by taking a look at all of your payment options and choosing the one that’s best for you. And to better understand what can affect your credit report and score, check out the resources on CreditRepair.com.


Jacob Hamilton

Jacob Hamilton

GM of CreditRepair.com

With his master's degree from the University of Phoenix, Jacob has been working as the General Manager for CreditRepair.com for 2 years. Jacob is passionate about consumer finances and doing everything he can to make credit repair accessible....

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