Many people love to get a tax refund from the IRS. But what do you do if you owe money to the IRS and it’s more than you can afford to pay. If you struggle to pay the IRS what you owe, it is best to pay what you can sooner than later and work out a plan with the IRS. One potential way to address the situation is to try to qualify for tax debt relief with tax settlement and offer in compromise options.
Tax relief encompasses various programs and initiatives aimed at helping taxpayers reduce or settle their tax bills and related debts. These options are available to both individuals and businesses. However, the specific tax relief programs you may qualify for depend on your status with the Internal Revenue Service (IRS), the amount of your tax debt, and other relevant factors.
Tax Debt Relief Overview
Tax debt relief is a method by which the US government helps when you are unable to afford your tax bill.
This can be a payment plan or settlement where the tax agency agrees to settle what you owe for less than the total amount due.
What Are The Most Common Tax Debt Relief Options?
If you owe money to the IRS, there are several options to make it easier to pay what you owe:
Tax Relief Payment Plans
The most common way to pay what you owe to the IRS is to set up a payment plan. You can usually split what you owe into smaller amounts that you pay every month over several years. There are two types of IRS payment plans:
- Short term: this plan is available for those who owe less than $100,000 and they receive up to six months to pay.
- Long term: This payment plan is more common and can take up to six years, but is limited to people who owe less than $50,000. You will make payments every month. You must have direct debit set up if the balance is more than $25,000.
Taxpayers can set up either payment plan online. You don’t need to pay a fee to enter the payment plans. After the payment plan application is approved, you can make your payments with a debt card, credit card, or bank account.
Keep in mind that interest will accrue on what you owe until you pay what you owe in full. Also, the long term plan requires you to pay a set up fee. If you decide to do non-direct debit payments, you will generally pay $130 to set up the plan online. The plan may cost $225 if you apply on the phone or in person or by mail.
Offer In Compromise for Tax Settlement
Another option for tax debt relief, if you qualify, is the Offer in Compromise (OIC) that lets you settle what you owe for less. However, you must meet these requirements:
- You don’t have enough income and assets to pay what you owe during the statutory period.
- You cannot pay or doing so will lead to extreme financial hardship.
- You don’t owe what the IRS says you owe and there was a misinterpretation of the US tax code.
To qualify for OIC, you need to be current with your tax filings and must be making mandatory estimated payments for the current tax year. You also cannot be in the bankruptcy process to qualify.
Keep in mind that most people are denied an OIC. So, you may want professional tax help with your OIC request before moving forward. However, if you can prove that paying what you owe to the IRS will stop you from paying for essential living costs, you could qualify for CNC or currently not collectible. This will give you more time to figure out how to pay the IRS without dealing with collections.
Fresh Start Program for Tax Relief
The Fresh Start Program is an IRS initiative designed to assist taxpayers who are behind on their tax bills. This program allows you to make an Offer in Compromise, enabling you to settle your debt for less than the full amount owed. The IRS determines the acceptable amount for these offers based on your income, assets, and household expenses.
If your offer is approved, you have two payment options:
- Lump Sum Payment: Pay at least 20% of the offer amount upfront, and then pay the remaining balance within five months.
- Periodic Payment: Make an initial payment with your offer and pay the remaining balance in monthly installments over the next six months to two years.
Offers in Compromise are generally challenging to get approved. The IRS provides a pre-qualifier tool to help you determine if this option is viable for your situation. To apply, you’ll need to complete Form 656-B.
Fresh Start Options for Taxpayers Behind on Payments
The Fresh Start Program offers several options to assist taxpayers who are behind on their tax payments:
- Offer in Compromise: This federal program allows you to settle your IRS tax debt for less than the total amount owed. It is available to taxpayers who owe more than they could reasonably pay at once or if paying the full amount would cause financial hardship.
- Currently Not Collectible (CNC): Under the CNC program, the IRS determines that your gross monthly income is too low to reasonably pay what you owe without causing financial hardship. Collection efforts are halted, and the IRS won’t levy your bank accounts, garnish your wages, or seize your assets. Instead, payments are deferred until you are financially able to pay.
- Installment Agreement: An IRS installment agreement allows you to pay your taxes through regular monthly payments over an extended period. Interest and penalties may continue to accrue until the balance is fully paid.
- Penalty Abatement: The IRS may reduce or remove penalties from your balance if you can prove you had a legitimate reason for not paying your taxes on time. Reasonable causes include fire, natural disasters, other disturbances, death, serious illness, or incapacitation of the taxpayer or an immediate family member, or an inability to obtain tax-related records. However, the IRS notes that “a lack of funds, in and of itself, is not reasonable cause for failure to file or pay on time.”
For more details, refer to the IRS guidance on Penalty Relief Due to Reasonable Cause.
Other Options To Pay Your Tax Debt
If you cannot or do not want to qualify for tax debt relief mentioned above, there are other options:
- Consider ways to increase your income. This may not be easy if you work full time, but there are more ways online to make additional money than ever. You may be able to offer a service online or sell things in your home to produce additional income to pay what you owe to the IRS.
- Borrow from your retirement plan. If you are under 59.5, borrowing from a 401k to pay for taxes won’t lead to a 10% early withdrawal charge. But this is not a good first option. If you borrow the money from your 401k, you will need to pay it back with interest within 60 months.
- Get a personal loan. A personal loan is usually unsecured and are not backed by an asset. If you have decent credit, you may be able to get a fair interest rate on a personal loan. Our loan experts can help you explore personal loan options and understand the rate you could qualify for.
- Tap home equity. Millions of homeowners have considerable equity in their homes in 2024. A popular way to access a lot of cash at a reasonable rate is to get a home equity line of credit (HELOC) or home equity loan. You need 20% equity in your home to qualify and you also have to have decent credit to get the best rate. Our loan advisors can help you explore your HELOC and home equity loan options. The rate could be much lower than personal loans and credit cards because it is backed by your house.
Summary on Tax Relief Opportunities
It is no fun to owe the IRS money. However, many people are behind in payments to the IRS. As long as you work something out with the tax agency and stay in communication, it is possible to get out of debt with the IRS. For most people, setting up a long-term or short-term payment plan is a way to get out of debt with the IRS. The IRS will generally be reasonable with you in setting up a payment plan if you communicate with them often about the tax debt.
However, if you cannot or do not want to get a payment plan with the IRS, you may want to think about getting a personal loan or second mortgage to pay what you owe. Depending on your credit and finances, you could score a low rate and pay what you owe the IRS at an affordable price.