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3 Options For Paying Your Tax Debt

By Chris Bibey

tax debt payment optionsDebt can cause a lot of stress no matter what kind it is. But when it comes to tax debt, things can get bad in a hurry. The last thing you want is for the IRS to be on your tail. Unlike other creditors, they have the power to do things such as take money from your paycheck and bank account and seize your property. Although dealing with tax debt can be stressful, with many options for paying, you should not be stuck in an impossible situation. Remember, if you owe money to the IRS, it should be the payment that trumps all other debt payments, other than your mortgage. Always pay the IRS first, because they can do things to collect the money unlike any other collector, such as garnishing your wages without a judgment. No matter how you feel about the IRS, don’t mess with them!

Three Common ways to Pay Tax Debt to the IRS

1. In full. How much is your tax debt? How much money do you have in cash? If you can afford to pay your entire bill in full you should do so. This is a good idea on many levels. For one, it means that your account will be back in good standing right away. Along with this, the IRS cannot charge you penalties and/or interest if you pay in full. This means that in the end you only pay what you actually owe. With this option there is no need to file additional paperwork. Instead, all you need to do is send in the proper amount of money with your return.

2. Installment agreement. So, you do not have the money to pay in full? The IRS offers several types of installment agreements for those who want to pay their debt in smaller amounts. There are five basic types of installment agreements. They include: guaranteed installment agreement; streamlined installment agreement; financially verified installment agreement; installment agreement over $100k, and partial payment installment agreement.

The one you select, as well as how you get started, depends on your situation. For example, those who owe less than $10k can use a guaranteed installment agreement. With this, all you have to do is complete Form 9465 and mail it to the IRS. If easier, you can also use the Online Payment Agreement Application.

A streamlined installment agreement is for taxpayers owing less than $25k. If you have more than this in debt, you must opt for a financially verified installment agreement. This is more involved, and the IRS will require you to fill out Form 433 which is used to verify your finances.

3. Offer in compromise. Okay, this is the one you have probably been waiting for. With this, you are not paying your entire tax debt. Instead, the IRS is agreeing to let you off the hook for a small portion of what you actually owe. This is not a bad idea on the surface, but there are some issues that you may run into. To start, you will only qualify for an offer in compromise if you can prove that you do not have the money to pay in full or through a payment plan. This is more difficult to do than most people believe. Not only do you have to prove that you don’t have the money to pay it, you have to show that there is no real chance of having the ability to earn enough money to pay the debt back in a reasonable amount of time. These are not granted very often, so I would not count on this option, but if you’ve been disabled or are in an extreme circumstance, it could be a viable option.

To give you a better idea of your odds, the IRS rejects approximately 85 to 90 percent of offers in compromise that they receive. If you feel that this may work, you need to file the following forms: IRS Form 656, IRS Form 656-A, IRS Form 433-A, and IRS Form 443-B.

What about IRS Negotiating Companies?

If you owe money to the IRS, you may be desperate for help. There is nothing wrong with weighing all your options, but you definitely want to avoid those companies that claim to negotiate your debt with the IRS.

Surely you have heard the television and radio commercials: “Pay the IRS pennies on the dollar. Let us help you eliminate your tax debt for less.” While all this sounds good, soon enough you will find that you are getting nothing of real value. Instead, these companies take an upfront fee, file some paperwork on your behalf, and are eventually rejected by the IRS, because you do not qualify for an offer in compromise. In the end, you spent money (sometimes $1k or more) that could have been put towards your debt.

If you owe money to the IRS, clear it as soon as possible. Start selling stuff or take a second job to get rid of it if you have to. This is not a creditor that you want to put off. They have unlimited power for collecting the debt, and it’ll make your life miserable if they end up taking a lump sum of money from you and it causes you to miss a rent/mortgage payment. Your best bet is to set up one of the installment agreements with them and then pay off more than the agreed monthly payment whenever you can to get it paid off quicker.

(photo credit: alykat)

Chris Bibey
Chris Bibey is a freelance writer who over the years has honed his personal finance experience by writing more than 100 feature articles on the subject. In his spare time, Chris enjoys sports - West Virginia football in particular!

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