Ask for an Extension
The best way to settle a tax debt is to pay it off in full prior to having the IRS contact you. If that’s not possible, your next best bet may to ask for an extension – more time to pay off what you owe before the interest and penalties get out of hand. A typical extension is 45 days, which is fairly easy to attain. If you still need more time, another 45 days may be allowed. As long as the IRS knows you’re aware of your debt and are trying to alleviate it, they will be willing to work with you.
Apply for an Installment Agreement
If you owe money to the tax man and are unable to pay in full, it may be possible to work out an arrangement whereby you can pay it off a bit at a time. An Installment Agreement can be worked out that will let you pay down your debt through prearranged payments. If possible, pay as much as you can up front so your payments are as low as possible. Late fees will probably still apply, but you may be able to avoid paying some interest with an Installment Agreement. The plan will have to be worked out with the IRS but making regular payments is better than not being able to pay at all.
Partial Payment Installment Agreement
If your debt is extremely high, and you’re unable to pay it off even with an Installment Agreement, you may be able to come to a compromise with the IRS. They may be willing to let you pay off part of the debt and the rest will be forgiven. It’s called a Partial Payment Installment Agreement (PPIA) and is self explanatory – you only have to pay part of your tax debt. If the IRS is convinced that you’ll never be able to pay off the entire debt a PPIA may be their solution. As you might expect, before they’re willing to forgive part of your debt they may require you to sell any possessions or property you may have, be it personal or business related, in order to pay down the debt. The terms of a Partial Payment Installment Agreement will be stiffer than with an Installment Agreement, but they work the same way – you make regular payments until the debt is settled. Your finances will be monitored, and if your income increases, your payments may rise accordingly.
Offer in Compromise
Another method the IRS accepts for people to settle a tax debt is called an Offer in Compromise (OIC.) It works in much the same way as a PPIA except that once you’ve agreed to the terms of an OIC, those terms remain constant until you’ve paid off your debt or fail to meet your financial obligations. If the latter happens you may be subject to stiffer penalties or even prosecution.
Not Currently Collectible
Exorbitant tax debt requires further evaluation by the IRS. If it is determined your debt is overwhelming and you won’t be able to pay at all, or not for a long time, you may qualify for Not Currently Collectible status. It doesn’t mean the debt is forgiven, only that you’re deemed unable to pay right now. You still owe the money, and the government may take out a tax lien on your future income. Interest and penalties will probably still apply. Before signing any agreement with the IRS, it would be a good idea to talk to a tax attorney or an accountant to make sure your interests aren’t being compromised.