Getting into tax debt is certainly no laughing matter. With the IRS on your trail, your financial future can be unpredictable – and scary.
The IRS has all the time in the world when it comes to recouping tax debt. If it’s not this year, then it could be next year when you’re stuck with a wage garnishment or bank levy. And the longer the back tax debt sticks around, the more in penalties and interest you’ll have to pay. If you find yourself in tax debt, getting out of it should the first thing on your mind. Many who owe IRS back tax debt don’t know how to get out. Here are a few tips.
If you want to get out of tax debt, paying it immediately – even with a credit card – is an option that you should seriously consider.
The IRS compounds interest on back tax debt daily until the day it’s paid. At the federal short-term rate plus three percent, it can add up. And that doesn’t include the five percent in penalties the IRS tacks on each month for back tax debt.
So paying your back tax debt immediately with a credit card can be a smart option. Your card’s interest rate can be less than the IRS’s penalties and interest that add up over time.
But if you’re not able to use your credit card to pay back tax debt, then pursuing an installment plan should be considered as a way of getting out of back tax debt.
Installment plans come with a fee if the total tax debt isn’t paid within four months. To apply, just fill out Form 9465, and if your back tax debt runs under $10,000 it’ll generally be approved if you plan to pay it within three years.
If your back tax debt is between $10,000 to $25,000, you may be able to obtain a six-year installment plan with your minimum payment determined by dividing the total tax debt by 72 (the total number of months over six years).
Another way of getting out of back tax debt is by pursuing an Offer in Compromise.
The Offer is Compromise (OIC) enables tax debtors to settle their back tax debt with the IRS by paying less than the total amount.
If your back tax debt is more than $25,000, then an OIC is a viable option. But, they have their upsides and downsides.
If you’re one of the few whose OIC is accepted by the IRS, you’ll have a five-year good behavior period afterward, and you’ll give the IRS more time by collecting the back tax debt because an OIC extends the statute of limitations. Also, you’ll lose your legal option of fighting your tax debt in court.
How to get out of tax debt can be a tricky proposition, but there are options. One easy way to get out of tax debt is by working with a tax professional beforehand, to prevent financially messy situations before they get out of hand.
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