No one wants to think about paying taxes. The idea of owing money can lead to tax anxiety. It can be even worse if you think you owe money for back taxes. You see a new tax bill coming up, and you still owe money from previous years. The stress of it can feel suffocating.
As much as it can be stressful, tax debt is a problem you need to face head-on. Trying to push it to the side will only make matters worse. There is also a lot you can do to manage the situation if you just pay attention to it. If you are responsible and do your best, there is usually a lot you can do to clear your back taxes.
What are your options for handling tax debt? Read on to find out!
Determine the Scope of the Problem
The first thing you need to do is determine the scope of the problem. You can’t begin to work on clearing debt if you don’t know how much you owe. Not only that, but you don’t want to start working on the problem only to find out later that it is much worse than you realized.
Review all your past tax returns to see how much you owe. If returns need amending, file the amended returns. If you have years that have yet to be filed, you need to take care of that as well. Getting your filings up to date will give you a clear idea of how much you owe. Along with that, it will show the IRS that you are serious about handling the issue.
Get an Extension
If your tax issues are relatively simple and only related to the current return, you could file for an extension. As long as you file for an extension before April 15, you can buy yourself an additional six months. This will give you more time to file and more time to pay. You just need to make sure to meet the new due date. Otherwise, you will have to pay penalties for late taxes.
Borrow to Pay
Tax debt can be a real burden. The IRS can also do a lot more to collect debt than other entities you might owe. This can make it a good idea to take some other form of debt to pay the IRS debt. Depending on the lender, the terms will likely be better, and it is often cheaper to service other forms of debt.
One good option would be something like a home equity loan. If you own your home or have paid enough of your mortgage, it can be an inexpensive way to borrow. A conventional mortgage might be another option. In some cases, paying with a credit card might be worth considering.
Statute of Limitations
If you are close to the statute of limitations on IRS debt, it might be a way to clear what you owe. However, this isn’t as simple as it may sound. The statute of limitations is ten years from the date of assessment. The IRS also has various maneuvers they might try to extend the limit. They also tend to pull out all the stops on collecting as the limit approaches.
Some tax debts are too large to pay all at once. In this case, you might be able to apply for an installment agreement with the IRS. A payment plan can allow you to reduce your debt gradually by making monthly payments.
However, eligibility and payment options can vary depending on various factors. For example, you can apply for a long-term payment plan if you owe less than $50,000 in total. This gives you more time to pay and makes the payments more manageable. If you owe less than $100,000, you can still apply for a short-term payment plan.
Some people might not have the ability to pay their tax debts. In the interest of being practical, the IRS does have options for these people. For example, you could apply to have your account put in “Currently Not Collectible” status. It doesn’t clear the debt, but it will pause collection efforts. Some people may also be eligible for an offer in compromise. That means the IRS agrees to settle your debt for less than what is owed. While these options can provide relief, the IRS does not agree to these types of filings easily.
As one final option, you should consider hiring a tax debt professional. If you don’t owe that much, you can handle it on your own. However, if your tax debt is substantial, a tax attorney will be able to help you manage the situation. They might be able to find ways to reduce the debt or buy more time. You have to pay for the service, but it can save you money while also making the situation easier to manage.
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