5 cost-effective ways to pay IRS debt
Receiving a notice from the Internal Revenue Service (IRS) about unpaid taxes can trigger feelings of fear, no matter what your original balance is. After all, the combination of the original tax liability plus the penalties and interest that accumulate over time can quickly transform what could have been a manageable debt into an overwhelming financial burden. And, the growing tax debt isn't the only issue at play, either. The fear that comes with having unpaid tax debt can also lead to making costly mistakes.
For example, some taxpayers opt to ignore IRS notices completely, hoping the problem will somehow disappear. Others rush to pay the tax debt using high-rate credit cards or retirement funds, creating new financial problems in a desperate attempt to resolve the issue. These panic-driven decisions typically make matters worse, as they can increase the cost of what you owe, sometimes dramatically, making it tough to dig out of the financial problems caused by owing money to the IRS.
Fortunately, you have options. The IRS, despite its intimidating reputation, has established several pathways for taxpayers to resolve their debts in manageable ways. These programs recognize that helping taxpayers get back into compliance benefits everyone. But what are the most cost-effective approaches to addressing your IRS debt?
Learn how to start tackling your IRS tax debt today.
5 cost-effective ways to pay IRS debt
The following approaches could help you save hundreds or thousands of dollars on your tax debt, making it more affordable and manageable to pay off what you owe:
Request an Offer in Compromise
An Offer in Compromise (OIC) allows you to settle your tax debt for less than the full amount you owe. This option is available when paying the full amount would create significant financial hardship. The IRS considers your ability to pay, income, expenses, and asset equity to determine eligibility. While there is an application fee, this approach can potentially save thousands of dollars for qualified taxpayers.
But while an OIC is a viable option worth exploring if you genuinely cannot afford to pay your full tax debt, it's important to understand that this option isn't guaranteed. If you qualify, though, an OIC is one of the most affordable ways to resolve tax debt.
Find out how to pay less on your IRS tax debt now.
Set up an installment agreement
An IRS installment agreement allows you to pay your tax debt over time through monthly payments rather than in one lump sum. For debts under $50,000, you can easily apply online using the IRS payment agreement tool. While penalties and interest continue to accrue during repayment, they do so at a reduced rate once the agreement is in place. Setting up an automatic payment plan can also help reduce fees and avoid potential collection actions.
Pursue penalty abatement
Penalties can add 25% or more to your original tax bill, but first-time penalty abatement is available to taxpayers with a clean compliance history for the three years before the year they received a penalty. And, success rates for first-time penalty abatement requests are high, making this one of the simplest ways to reduce your overall tax debt without affecting the underlying tax obligation.
Request Currently Not Collectible status
If paying your tax debt would prevent you from meeting basic living expenses, you can request Currently Not Collectible (CNC) status. When approved, this status gives you breathing room to improve your financial situation without the immediate pressure of collections. The debt doesn't disappear, but collection efforts pause, and in some cases, the 10-year statute of limitations on collections may expire before your financial situation improves enough to pay.
Consider a partial payment installment agreement
A Partial Payment Installment Agreement (PPIA) combines elements of both installment agreements and Offers in Compromise. You make monthly payments to the IRS based on your current financial situation, but unlike a regular installment agreement, you're not required to pay the full amount before the collection statute expires. This means you may end up paying significantly less than your total debt while still resolving your obligation with the IRS.
Should I work with a tax relief agency on my IRS debt?
If navigating your IRS debt relief options feels overwhelming, working with a tax relief agency could be a smart move. These professionals specialize in negotiating with the IRS and their expertise can be invaluable if you're unsure how to handle the process or want to maximize your chances of reducing what you owe.
Because the experts who work for tax relief agencies understand the nuances of IRS negotiations, they can help you identify the best course of action for your specific financial situation. While there are fees associated with hiring a tax relief company, the potential savings, both in reduced tax liability and avoided penalties, can outweigh the cost.
The bottom line
Paying off IRS debt doesn't have to drain your finances. By exploring cost-effective options like an Offer in Compromise, installment agreements and penalty abatement, you may be able to find a strategy that works within your budget. If you're struggling to handle IRS negotiations on your own, a reputable tax relief agency may help you secure a better deal. Either way, it's important to act sooner rather than later, as delaying payments or ignoring IRS notices will only make things worse.
