How to Deal with Huge Tax Debt

How to Deal with Huge Tax Debt

Published on January 27, 2025

Owing taxes to the IRS can be overwhelming, but there are options to reduce or manage your debt. Understanding the collection process and knowing what steps to take can help prevent financial distress. Below is a summary of the available options to deal with tax debt.

Collection Process

When taxes aren’t paid by the filing deadline, the IRS sends a bill outlining the balance owed, including penalties and interest. This triggers the collection process, which continues until the debt is paid or the IRS’s ability to collect expires (usually within 10 years of assessment). While this debt accumulates daily interest (currently 3% + 8% for 2024) and penalties of up to 25%, options exist to manage or lower this burden.

Payment Options

  1. Credit Card or Bank Loan: While not typically ideal, paying tax debt using a credit card or bank loan could be more cost-effective than the IRS penalties and interest, depending on your bank’s rates.

  2. Levies and Liens: The IRS can seize assets to collect the tax debt. A levy allows the IRS to take wages, bank accounts, and other assets, while a lien is a legal claim to your property to secure payment, making it harder to sell or finance the property. Liens can be withdrawn if conditions are met, such as entering an installment agreement.

Payment Plans

For taxpayers who cannot pay the full amount upfront, the IRS offers various payment plans:

  • Short-Term Payment Plan: This plan allows up to 180 days to pay off debt and is available for those owing less than $100,000 in combined tax, penalties, and interest.

  • Installment Agreements: If more time is needed, taxpayers can apply for an installment agreement, which spreads payments over up to 72 months for debts under $50,000. For amounts between $25,000 and $50,000, direct debit is required.

The IRS allows taxpayers to apply for a payment plan online or by submitting Form 9465. Setup fees for payment plans are relatively low, ranging from $31 to $131, with possible waivers for low-income taxpayers. While on a payment plan, the IRS suspends collections, though failure to adhere to the plan may lead to default.

Offers in Compromise (OIC)

An Offer in Compromise is an agreement that allows taxpayers to settle their tax debt for less than the full amount owed, but it’s challenging to secure. The IRS will only accept an OIC if they believe you cannot pay the full amount through other means. To qualify, you must submit detailed financial information and meet several conditions, including filing all required returns and making any necessary estimated payments. There is a $205 application fee, though low-income taxpayers may be exempt. There are two types of offers: Lump Sum Cash (paid within five months) or Periodic Payment (paid over six to 24 months).

OICs are public records for one year, and the IRS may publish details about your case, including your name and the terms of the offer.

“Currently Not Collectible” Status

If you face severe financial hardship and cannot pay any of your debt, the IRS may temporarily report your account as “currently not collectible.” This status halts collection efforts but does not erase the debt, and penalties and interest accumulate. There are additional relief options in certain situations, such as for U.S. military members or spouses unaware of the tax debt.

Your Rights and Additional Help

If you disagree with an IRS decision, you can request a Collection Due Process (CDP) Hearing or an equivalent hearing within 30 days of receiving a notice. This allows you to challenge collection actions or propose alternative payment options. You may also request penalty abatement if this is your first offense or if other specific criteria are met.

The Taxpayer Advocate Service is an independent agency within the IRS that helps protect taxpayers’ rights. You can also consider private tax-debt services, though be cautious of fees for services that can be accessed directly from the IRS.

Example: Alex’s Experience

Alex, a taxpayer with a history of tax debt, faced a $30,000 debt four years ago and successfully negotiated an Offer in Compromise (OIC) to reduce it to $17,000. However, when his tax debt increased to $36,000 in 2022, the IRS denied his OIC request because of his prior history. He paid $11,000 on his credit card and entered a short-term payment plan to cover the remaining balance. By following this strategy, Alex avoided the harsher late payment penalties and cleared his debt by October 2023.

Conclusion

Owing taxes can be intimidating, but the IRS offers various options to help you manage or reduce your debt. Whether you choose a short-term payment plan, negotiate an Offer in Compromise, or request temporary relief, there are pathways to address tax issues without facing extreme penalties. Understanding your options and following the IRS guidelines is crucial for avoiding severe financial consequences.

Return to Blog

Read other blog posts

Got IRS Penalties? Know the Rules, Pay Nothing

Published on January 20, 2025
If you’ve received an IRS penalty notice, you may not need to pay it immediately. The IRS imposes various penalties for late tax returns, unpaid taxes, and failure to deposit employment taxes, but there are options to have these penalties reduced or removed entirely. Here’s how you can handle it. Common IRS Penalties The IRS […]
Got IRS Penalties? Know the Rules, Pay Nothing

Charitable Contributions From Your IRA: Tips and Traps

Published on January 13, 2025
When you turn 70½, you gain the opportunity to use your IRA for charitable contributions in a tax-efficient manner. This strategy allows you to make charitable donations directly from your IRA, known as Qualified Charitable Distributions (QCDs), which can potentially offer significant tax advantages compared to withdrawing funds from your IRA and donating them personally. […]
Charitable Contributions From Your IRA: Tips and Traps

QBI Deduction: Maximize It Before It’s Gone

Published on December 30, 2024
The Qualified Business Income (QBI) deduction, introduced by the Tax Cuts and Jobs Act (TCJA), offers a valuable opportunity for business owners to reduce their tax liability by up to 20% of eligible business income. This deduction applies to income from sole proprietorships, partnerships, S corporations, and other pass-through entities, as well as some dividends […]
QBI Deduction: Maximize It Before It’s Gone

2024 Year-End Tax Strategies for Your Stock Portfolio

Published on December 23, 2024
As 2024 comes to a close, it’s crucial to review your stock portfolio to implement strategies that minimize taxes. By making some strategic moves, you can avoid paying high taxes on short-term capital gains and lower the tax rate on your gains, potentially reducing it to 23.8% or even 0%. Here are seven strategies to […]
2024 Year-End Tax Strategies for Your Stock Portfolio

Primer: When Cancellation of Debt (COD) Income Can Be Tax-Free

Published on December 09, 2024
When a borrower’s debt is canceled, it generally results in a Cancellation of Debt (COD) income, which is taxable under federal law. However, several essential exceptions allow this income to be excluded from taxes, depending on the circumstances. Here’s an overview of when and how COD income can be tax-free: General Rule: COD Income Is […]
Primer: When Cancellation of Debt (COD) Income Can Be Tax-Free

Do You Owe Self-Employment Tax on Airbnb Rental Income?

Published on December 02, 2024
A key question for many Airbnb hosts and vacation property owners is whether they owe self-employment tax on the income they earn from renting out their properties. The IRS addressed this issue in **Chief Counsel Advice (CCA) 202151005**, which provides insights into the treatment of rental income for self-employment tax purposes. However, it’s important to […]
Do You Owe Self-Employment Tax on Airbnb Rental Income?

Are You Cheating Yourself by Using IRS Mileage Rates?

Published on November 25, 2024
Choosing Between IRS Mileage Rates and Actual Expenses for Business Vehicle Deductions In 2022, if you purchased a $50,000 SUV for business use and drove it 15,000 miles (87% business-related), you would have to decide whether to use the IRS standard mileage rates or the actual expense method to deduct vehicle-related costs. The IRS mileage […]
Are You Cheating Yourself by Using IRS Mileage Rates?

The Supreme Court Likely Shook Up Your Buy-Sell Agreement

Published on November 11, 2024
The U.S. Supreme Court’s recent decision in the Connelly case significantly impacts businesses that utilize buy-sell agreements funded by life insurance for shareholder succession. This ruling may affect estate tax liabilities and the valuation of company shares when a shareholder dies, prompting companies to reconsider their agreements. Background on Buy-Sell Agreements Buy-sell agreements are essential […]
The Supreme Court Likely Shook Up Your Buy-Sell Agreement

The Department of Labor Makes It Harder to Hire Independent Contractors

Published on November 04, 2024
The U.S. Department of Labor (DOL) is tightening regulations around the classification of workers, making it more challenging for businesses to classify workers as independent contractors instead of employees. This shift is primarily aimed at ensuring more workers receive protections under the Fair Labor Standards Act (FLSA), which mandates minimum wage and overtime pay. FLSA […]
The Department of Labor Makes It Harder to Hire Independent Contractors

BOI Latest Updates for Dissolved and Disregarded Entities

Published on October 28, 2024
As the deadline for filing Business Ownership Information (BOI) reports approaches, businesses must ensure compliance with the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). Understanding the specific requirements and recent updates is critical to avoid severe penalties. Filing Deadlines Businesses that existed on January 1, 2024, are required to file their BOI […]
BOI Latest Updates for Dissolved and Disregarded Entities