If you find yourself facing back taxes, know that you are not alone. Recent trends demonstrate that close to half of all taxpayers owe the IRS some type of payment from the previous tax year. The bigger issue, though, is keeping those back taxes manageable and not drowning in tax debt.
It is not always possible to pay back all your tax debt immediately. However, there are several solutions to keep the debt manageable, as well as remain in good standing with the IRS.
1. Request an Extension
Please note that asking for an extension on back taxes is different from asking for an extension on filing your returns. Both extensions exist, but the latter one will not free you of paying back debt.
Meanwhile, requesting an extension on paying back taxes, through the Online Payment Agreement application or by calling 800-829-1040, could grant you an additional 60 to 120 days to pay back the taxes in full. That is two to four months to save up for repayment, assuming the debt is still manageable.
2. Enter an Installment Agreement
There is one feasible way of dealing with back taxes that goes directly through the IRS, which is known as an installment agreement. It is essentially a small interest loan that you agree to pay off over a certain period of time.
The IRS installment agreement is fairly flexible. You can determine how much you want to pay the IRS each month, but make sure you will have the funds available, because the IRS automatically withdraws the funds on a selected date each month. If you fail to have the appropriate amount of funds, you could lose your good standing status with the IRS.
An installment agreement with the IRS is available to taxpayers with $50,000 or less in back taxes. If you owe the IRS more than $50,000, you should consider other options.
3. Request an Abatement of Penalties
Though it will not free you of all tax debt, you can get some relief from penalties (as well as interest) by requesting an abatement. To request an abatement, write a letter to the IRS informing them of financial hardship and requesting an abatement of penalties and/or interest.
4. Propose an Offer in Compromise (OIC)
An Offer in Compromise (OIC) is one of the best solutions for paying back taxes. It is a settlement with the IRS that generally forgives you for a portion of your debt so long as you agree to pay back the rest.
It sounds like a dream, right? The problem is, not all OICs are accepted by the IRS. You may receive a settlement offer that feels like you are getting the short end of the deal. However, these settlements do work well for people who owe excessive back taxes and have no clear path out of the sticky situation.
If you are considering an OIC, we recommend you consult a tax professional. It’s not a bad idea to have professional help on your side to improve the odds of your OIC being accepted.
5. Refinance Your Home
Homeowners could quickly find themselves with some extra cash by refinancing a home loan. This is a decent solution for individuals who have equity and need it to resolve debt, such as what is owed to the IRS.
Mortgage rates are generally better than interest on a credit card (read our next suggestion for more details on that). Additionally, you can deduct home mortgage interest on your income taxes if you itemize.
6. Pay By Credit Card
Most accountants will tell you that replacing one debt with another is not a step forward, which is partly true. However, if you are in a difficult circumstance where the IRS wants payment back immediately, it is a secondary option.
If you have the funds on a credit card, you can temporarily buy yourself some time by getting back in the good graces of the IRS. However, the bad thing about credit cards is that the interest is very steep, so we only recommend it in dire situations.
Need Help With Back Taxes?
Though we’ve gone over some effective ways to pay off back taxes, these options don’t apply to every situation. If you are still having trouble finding a viable method to get you out of tax debt, or you want professional legal advice before moving forward, contact us at 800-TAX-LEVY or visit www.levytaxhelp.com.