Owing money to the IRS can be overwhelming, and while it may seem like you have a lot of options the reality is that only one or two of these might apply to your situation. Let’s go over the multiple ways the IRS offers to resolve tax debt depending on your financial situation. Included with these options are real-world examples of how they work in individual situations like yours.
1. Offer in Compromise (Settle for Less Than You Owe, maybe even NOTHING)
An Offer in Compromise (OIC) allows you to settle your tax debt for less than the full amount if you meet strict IRS financial hardship criteria.
Example: Mike, a self-employed contractor, owed $55,000 in back taxes after a tough few years in business. He had minimal assets and low income. After submitting an OIC the IRS agreed to settle his debt for just $6,500.
2. Currently Not Collectible (Temporarily Stop IRS Collections)
If you can’t afford to make even the smallest payment without purring yourself in economic hardship, you may qualify for Currently Not Collectible (CNC) status. While in CNC status, the IRS temporarily halts collection actions, such as wage garnishments and bank levies.
Example: Sarah, a single mother of three, lost her job and couldn’t afford to make payments on her $18,000 tax debt. She applied for CNC status, by calling the IRS, and the IRS agreed to pause all collection efforts. This gave her time to get back on her feet financially without dealing with IRS collections at the same time.
3. Installment Agreement (Monthly Payments)
If you can’t pay your tax debt all at once (Option 7), an Installment Agreement allows you to make manageable monthly payments over time.
Example: John and Lisa owed $25,000 to the IRS due to several years of side hustle income. They didn’t have the cash to pay it in full, so they set up a long-term installment agreement, paying $300 per month. This stop the IRS from getting aggressive with collection actions and allowed them to budget their payments from current income.
4. Bankruptcy (Discharge Tax Debt in Certain Cases)
In some cases, filing for bankruptcy can eliminate tax debt. Chapter 7 or Chapter 13 bankruptcy may allow you to discharge old income tax debts if they meet specific criteria.
Example: David, a small business owner, had accumulated $40,000 in tax debt over the years. He filed for Chapter 7 bankruptcy, and because the taxes were more than three years old and filed on time, a large portion of his tax debt was discharged.
5. Innocent Spouse Relief (Avoid Responsibility for a Spouse’s Tax Debt)
If your tax debt is due to the actions of a spouse—such as underreporting income without your knowledge—you may qualify for Innocent Spouse Relief.
Example: Emmitt discovered after his divorce that his ex-wife had hidden $125,000 in income from him, reported it on their tax return and then filed the return without his knowledge. This resulted in a large IRS bill in both of their names. He applied for Innocent Spouse Relief and was released from liability, leaving his ex-wife solely responsible for the debt.
6. Wait Out the Statute of Limitations on Collections (DEFAULT)
The IRS has a 10-year statute of limitations for collecting tax debt. If your tax debt is getting close to its 10th birthday, know that the IRS may not be able to legally collect from you after the statute expires.
Example: Robert owed $20,000 from a failed business in 2014. By 2023, with only a few years left on the statute of limitations, he decided to wait it out. At the 10 year point, without any action from Robert, the IRS debt expired, never to be heard from again.
7. Pay in Full (Eliminate Debt and Avoid Further Penalties)
If you can, the simplest way to resolve your IRS debt is to pay in full.
Example: Jessica inherited money after the death of her brother and used it to pay off her $15,000 IRS debt in one lump sum. By doing so, she avoided further penalties and interest, giving her peace of mind.
8. Penalty Abatement (Reduce or Remove IRS Penalties)
Most likely penalties are a large part of your IRS balance. If this is due to circumstances beyond your control, you + may qualify for Penalty Abatement.
Example: Tom, after 10 years of filing and paying his taxes on time, was hit with $8,000 in IRS penalties because he missed filing deadlines while recovering from a major surgery. He applied for a First-Time Penalty Abatement and had the penalties removed, significantly reducing his balance.
9. Replace Substitute for Return (SFR) Tax Assessments
If you didn’t file a tax return, the IRS do it for you by filing a Substitute for Return (SFR), often resulting in a much higher tax bill. You can usually replace the SFR with an accurate tax return, reducing your liability.
Example: Maria never filed her 2016 taxes, so the IRS filed an SFR, claiming she owed $30,000. She later filed her correct return, including deductions and credits, and her actual tax bill dropped to $5,500.
10. Dispute the Tax on Technical Grounds
If you believe the IRS incorrectly charged you taxes, you can challenge the debt on technical grounds.
Example: Kevin received a tax bill for $10,000 due to an IRS audit, but after reviewing the report, he found errors in how the IRS calculated his income. He filed an appeal, presented his evidence, and had the tax bill reduced by 80%.
Take Action Before the IRS Does
Ignoring your tax debt can lead to serious consequences, including tax liens, wage garnishments, and bank levies. The good news is that you have options, although probably only two or three. Use this list to eliminate the ones that won’t work in your situation. Then move forward with the best remaining choice.
Whether you qualify for an Offer in Compromise, installment agreement, or penalty abatement, there’s a solution that can help.
Need help narrowing your choices? Tax Rescue CPA can guide you through the process and get you on the right track. Contact us today and avoid IRS stress!
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