Tax Relief

Five Ways to Eliminate Tax Debt

To paraphrase Ben Franklin, the only certainties in life are death and taxes. But what happens when you can’t afford the tax you owe, you make a mistake when filing, or any other possible scenario that occurs causing you to owe more tax to the IRS than you can afford?

Few financial difficulties can be more intimidating than tax debt. Fortunately, alternatives to paying off the balance without coming up with a single, lump sum payment do exist. There are five different ways this can be accomplished:

  1. Offer-in-Compromise(OIC)
  2. Not Currently Collectible
  3. Installment Agreement
  4. Partial Payment Installment Agreement
  5. Filing Bankruptcy

Let’s examine each in detail.

Offer in Compromise (OIC)

This is the only way to settle your debt with the IRS for less than what you owe, other than completely eliminating certain qualified IRS debts by filing for bankruptcy.

The OIC program allows you to negotiate a payoff amount with the IRS that is often much less than what you owe. Unfortunately, the IRS only approves about one third of the proposed OIC plans. However, the IRS recently changed the rules, and the new standards should make it far easier to get your OIC plan approved. The IRS has also declared that it will greatly reduce the processing time for OIC plans.

Here is how the old system worked. The difference between your monthly income and expenses would be multiplied by 48 if you wanted to pay off the amount in less than five months, and by 60 if you planned to pay it off over a longer period of time.

So if the difference between your income and expenses is $100 per month, and you plan to pay it off as soon as possible, then multiplying it by 48 gives you $4,800. This means the IRS would accept $4,800 dollars to settle your debt, no matter what is owed, plus what it determines as the “quick sale value” of the rest of your assets that have equity. No matter what you actually owed the IRS, they will accept this amount assuming your OIC plan is approved.

Probably the biggest change under the new OIC program is to the multiplier. Now, your disposable income is multiplied by only 12 instead of 48, or only 24, instead of 60. This will greatly reduce the amount of money the IRS will be willing to accept for an OIC plan.

Another significant change to the OIC program revolves around the concept of allowable expenses. The IRS sets standards that you can claim for things such as housing and transportation for every geographic area. Even if your actual expenses are more, you can only claim the IRS standards for calculating your OIC. But under the recent changes, the national standards are now far more relaxed. Not only are higher costs allowed, but now even a certain percentage of credit card payments, student loans, and delinquent taxes are allowed as an expense.

Not Currently Collectible

The IRS will determine that you are “not currently collectible” if you have no ability to pay your tax debts. This occurs if the IRS receives sufficient evidence that you have no ability to pay even a portion of the debt owed to the IRS. When you are deemed not currently collectible, the IRS will cease all collection attempts, other than sending an annual bill stating how much is still owed.

The ten year statute of limitations to collect an IRS debt does not stop running while you are deemed not currently collectible. Consequently, if your status does not change until the statute of limitations has run its course, then the tax debt will expire and you will owe nothing to the IRS. It may be difficult to endure the financial hardship of being declared not currently collectible long enough to outlast the statute of limitations. But, if you can accomplish this feat, then you will be able to avoid paying off your tax debt to the IRS.

Installment Agreement

The IRS is flexible when it comes to payment plans. A basic installment plan for the purpose of paying off your full IRS balance can be done in four different ways.

  1. Guaranteed Installment Agreement – If you owe less than $10,000 the IRS is required to agree to an installment payment plan if…
    • a) All of your tax returns have been filed.
    • b) Your prior five years of tax returns were filed on time.
    • c) You file all of your future tax returns on time and pay the taxes on time while in the installment plan.
    • d) In the last five years, you haven’t been in a previous installment plan.
    • e) The amount of your monthly payment pays off your total IRS balance in 36 months.
  2. Streamlined Installment Agreements – If you owe less than $50,000 and can pay off your debt in 72 months, you can qualify for a streamlined installment agreement. Just like in a guaranteed agreement, you must file your future tax returns on time and make all payments on time while in the plan. All prior tax returns must have been filed as well.
  3. Non-Streamlined Installment Agreements – If you owe more than $50,000, or if you need a payment plan longer than five years, or if you don’t qualify for a guaranteed or streamlined plan for another reason, then your own installment agreement will need to be negotiated with the IRS.

Unlike guaranteed and streamlined agreements, non-streamlined agreements are not automatically approved. Additionally, the IRS will typically file a federal tax lien as part of this type of installment plan. Because tax liens are reported to the credit bureaus, it will be harmful to your credit score.

Partial Payment Installment Agreement

If you cannot afford the minimum payment required for a guaranteed or streamlined installment plan, then a partial payment installment agreement might be a better option.

In a partial payment installment agreement, the monthly payment is based on what you can afford based on your living expenses. The duration of the plan can last longer than a streamlined or guaranteed plan, but the IRS may file a tax lien to protect itself in case you stop making your monthly payments. Every two years the IRS will re-evaluate the terms of the agreement in case your circumstances change and you are able to pay more.

Filing Bankruptcy

Filing bankruptcy can completely eliminate IRS debt as long as it meets certain criteria. It has the advantage over the other methods of eliminating tax debt because it requires no payment plan, or waiting for a statute of limitations to expire while you earn little income. It is the only way to quickly and simply eliminate all of your tax debt, without paying a dime to the IRS.

In order for tax debt to be eliminated in bankruptcy, it must meet the following qualifications:

  1. The debt must be related to taxes that were due at least three years before filing for bankruptcy.
  2. The tax return must have been filed at least two years before filing for bankruptcy.
  3. The IRS assessment of the tax must have been done more than 240 days before filing for bankruptcy.
  4. The taxpayer must not have been found guilty of tax evasion.
  5. The tax return must not have been fraudulent.

If only some of your tax debt meets these qualifications, then only that portion of your total tax debt will be eliminated. This can occur if your tax debts stem from several years of unfiled income taxes. Your older tax debts may be eliminated while the recent ones are not. Some choose to wait to file until the entirety of their tax debt qualifies for discharge via bankruptcy.

If you are contemplating bankruptcy for the purpose of eliminating tax debt, it is important to speak with an experienced bankruptcy attorney before proceeding.