Dealing with the IRS and accruing debt are arguably two of the most stressful parts of handling your finances. Find yourself in a situation where you’re in debt to the IRS? That’s a nightmare.
Although the prospect of settling your tax debt might make you want to escape to a deserted island indefinitely, following these steps will help get you back on track. Guess what? Your problem is solvable.
#1 Take an Honest Look at the Problem
Settling your tax debt isn’t going to be fun. It’s going to be expensive and time-consuming. Accepting these facts is an unfortunate reality you’re going to have to come to terms with. The sooner you evaluate how much you owe, the sooner you can start moving forward and putting your tax debt behind you.
#2 Understand Your Options
When you’re in debt to the IRS, the bottom line is you’re almost always going to have to pay back all the money you owe.
This can be done in a few different ways:
- Pay It Off – If there’s any way you can afford to pay off the entirety of your debt as a lump sum, it’s often your best option.
- Not Currently Collectible – This is an IRS program that essentially buys you time. If you can’t pay your debts and you successfully apply to this program, you’ll be given about a year until collection is due.
- Payment Plans – Much like any other type of debt, tax debt can often be settled via a payment plan. An IRS Installment Agreement allows you to pay back the money you owe over time. This helps ease the immediate financial burden while still making progress toward a settlement.
Although it’s rare, there are some instances when you won’t have to pay back all the money you owe:
- Offer in Compromise – If the IRS determines that paying back your debt would cause you extreme financial hardship, they may accept an offer in compromise. If you qualify, you’ll be able to settle your debt for far less than you owe.
- Bankruptcy – In some instances, filing for bankruptcy can relieve your personal obligation toward paying off your tax debt. However, this option represents a huge financial decision, and not all types of bankruptcy filings result in relieving you from IRS debt.
#3 Take Action Quickly
If you don’t start taking steps towards paying off what you owe to the IRS, the situation is going to snowball into a significantly bigger problem. Even if you don’t owe a ton of money, when you’re dealing with the IRS, not paying a small sum can quickly go from an inconvenience to a serious issue.
If you don’t take action, you risk being subject to the following consequences:
- Interest – Not paying your balance on time results in accruing interest that compounds daily and monthly, which can add a substantial amount to what you already owe.
- Liens – A lien is a legal document in which the IRS states their claim in terms of your debt. Liens are usually placed against your property as a way to secure payment.
- Levy – A levy is when the IRS actually takes your property as a result of failing to provide alternate means of payment.
#4 Hire a Pro
If you’ve found yourself struggling with tax debt, you already know how confusing, frustrating, and complicated managing taxes can be. Unless you’re in a financial position to simply pay off your debts outright, you may need to hire a professional to help guide you through the process. Although they might cost you a pretty penny, they’ll be able to help untangle you from the dreaded IRS web.
#5 Learn from Your Mistakes
There are a variety of ways you may have gotten into tax debt. Once you’ve experienced the ordeal of owing the IRS money you don’t have, it’s likely you’ll do anything in order to avoid making the same mistakes again. If you use this process as a learning experience, you’re more likely to be in better shape the next time tax season rolls around.
You’re Ready.Now that you know the five steps needed to start settling your tax debt, what are you waiting for? Get organized and get going. You’ll thank us for the push when you no longer have tax debt looming over your head—no deserted island needed.