- Past due income taxes accrue penalties and interest until paid.TAX TIME image by brelsbil from Fotolia.com
Income tax problems with the Internal Revenue Service (IRS) drain you financially. The IRS uses a variety of collection methods to recover tax debts, such as garnishment of your wages and bank accounts, property liens and asset seizure. Options are available to you if you are unable to pay your taxes in full and do not want the IRS to initiate further collection activities. - The IRS has installment agreements in which you pay back the debt in smaller amounts over time, such as a period of five years. Interest is charged on the tax owed, so the total amount paid is greater than the actual owed tax. The type of agreement you receive depends on how much you owe. A guaranteed plan is available for taxpayers who have less than $10,000 in debt that can be paid off in three years. A streamlined plan is for taxpayers who owe less than $25,000 and do not want to provide financial documentation. A verified financial plan is for taxpayers who owe more than $25,000 or cannot afford the payments under a streamlined plan, and a partial plan is for taxpayers who are paying less than what is owed due to financial constraints.
- You are permitted to make an offer to the IRS to settle the tax debt you owe. The offer is typically much less than the actual money outstanding. The likelihood of acceptance sometimes depends on your current worth and financial outlook. If the IRS decides you are not able to afford a repayment plan and your offer is greater than or about the amount the IRS expects to receive from you over the collection period, your offer is accepted. Once you pay the agreed amount to the IRS, your tax debt is settled in full and collection actions cease. The IRS considers compromise offers if you have an exceptional circumstance, such as a costly medical illness, or if your actual tax debt is in doubt.
- The IRS allows you to file for hardship if an unexpected event has drained your finances, like a serious medical illness of an immediate family member. You must provide financial documentation and proof of the hardship event, but if you qualify, the IRS will not collect from you until your financial situation improves.
- Tax debt is generally not eligible for discharge in bankruptcy, but a Chapter 13 filing puts your creditors, including the IRS, on a repayment plan as determined by the court. The IRS must cease collection actions while you are under the automatic stay from creditors granted upon a bankruptcy filing, and you may pay less than you owe in taxes, at the discretion of the judge. You still must pay the balance of any taxes owed after the completion of your repayment plan.
