How to settle your IRS tax debt

Tax season can feel stressful each year — and that's true for a few different reasons. For starters, you have to gather a lot of paperwork and information to file, and if you have more than one source of revenue, it can be tough to keep track of. And, in some cases, life throws us a curveball, and we find ourselves facing an unexpected tax debt with the Internal Revenue Service (IRS). 

If you aren't prepared for that type of expense this tax season, it can cause some serious damage to your finances. And, if you don't have a savings account that's flush with cash, you could end up in serious trouble with an unpaid tax bill. Considering that the IRS takes tax payments very seriously, you probably want to avoid that situation if at all possible.

Luckily, if that happens, there are various avenues available to settle your tax debt and get back on track financially. So, if you don't have the cash on hand to settle your IRS tax debt, consider some alternatives to help you find the best solution for your unique situation.

Find out what your top tax relief company options are here.

How to settle your IRS tax debt

If you need to settle your IRS tax debt, you have a few different options, including: 

Tax debt relief

Utilizing a tax debt relief or tax settlement service can be a lifesaver for those struggling to pay off their IRS obligations. This option involves utilizing a private tax relief service or tax relief company to reduce or eliminate your tax debt or help negotiate a repayment plan with the IRS. In other words, this type of program is designed to alleviate the burden of your tax debt and make repayment more manageable.

And, there are a number of tax deductions and credits available, and not all of them apply to every situation. That factor, coupled with the sheer number of options for credits and deductions, can also make it a challenging landscape to navigate — and it can be tough to know how and when the deductions and credits apply. 

So, to negotiate a beneficial payment plan, it can make sense to work with a tax relief company to better navigate the process. Keep in mind, though, that the IRS is generally more inclined to consider this option if there is doubt about the collectibility of the full debt.

Find out more about your tax debt relief options here. 

Offer in compromise

You also have the option to try and settle your tax debt with an offer in compromise, which is a program that allows eligible taxpayers to settle their debt for less than the full amount owed. The IRS assesses your ability to pay based on your income, expenses, assets and overall financial situation. 

If it's determined that paying the full amount would create undue hardship, the IRS may accept a reduced sum as payment in full. This option is ideal for those facing significant financial hardship and that can prove their inability to pay the full debt.

Installment agreement

If you can't afford to make a lump sum payment, an installment agreement directly with the IRS may be a practical solution. This arrangement allows you to pay off your tax debt in manageable monthly installments. While interest and penalties may still apply, the installment agreement provides a structured and realistic way to settle your debt without putting excessive strain on your finances.

Temporary delay

In some cases, the IRS may grant a temporary delay in collection efforts if you're facing significant financial hardship. This option doesn't eliminate your debt — but it does provide a brief reprieve during which the IRS will refrain from collection actions. It's crucial to communicate openly with the IRS and provide documentation supporting your financial hardship to qualify for this temporary delay.

Penalty abatement

Or, if you can demonstrate reasonable cause for the failure to pay your tax debt on time, the IRS might consider a penalty abatement. This doesn't reduce the actual tax debt but eliminates or reduces penalties associated with late payment. Valid reasons for penalty abatement include serious illness, natural disasters or other extraordinary circumstances.

DIY debt settlement

Negotiating a settlement directly with the IRS may also be an option in certain situations. This involves proposing a lump sum payment that is less than the total amount owed. Keep in mind that the IRS is generally more inclined to consider this option if there is doubt about the collectibility of the full debt.

The bottom line

Dealing with IRS tax debt can be a stressful experience, but understanding your options is the first step toward financial recovery. But remember, no matter what option you choose, communication with the IRS is key – so be sure to keep them informed about your circumstances to help you find the best solution to settle your tax debt and regain control of your financial future.