Tax debt relief is a broad term that covers any incentive, program or service that helps you reduce or eliminate your outstanding tax debts. This typically means setting up a payment plan or requesting an offer in compromise (OIC) with the IRS. It may also include working with a company that will negotiate with the IRS on your behalf — although you can do much of the work on your own.
Is there tax relief at the state level?
While many tax relief programs exist at the federal level, there are also state options. They’re generally covered by the same laws and procedures that govern federal tax relief. However, availability of programs, credits and other forms of tax relief vary between states.
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Debt relief companies typically charge a percentage of a customer’s debt or a monthly program fee for their services. And not all companies are transparent about these costs or drawbacks that can negatively affect your credit score. Depending on the company you work with, you might pay other fees for third-party settlement services or setting up new accounts, which can leave you in a worse situation than when you signed up.
Consider alternatives before signing up with a debt relief company:
Payment extensions. Companies you owe may be willing to extend your payment due date or put you on a longer payment plan if you ask.
Nonprofit credit counseling. Look for free debt-management help from nonprofit organizations like the National Foundation for Credit Counseling.
Debt settlement. If you can manage to pay a portion of the bill, offer the collection agency a one-time payment as a settlement. Collection agencies are often willing to accept a lower payment on your debt to close the account.
Pros and cons of settling tax debt through a company
Tax relief services are designed to take the stress out of tax debt, helping you determine how much you owe and the best way to settle your debts.
Free consultation. Many tax debt relief companies offer free consultations to determine exactly how much you owe and to whom. This can give you a better idea of where you stand.
Offer resources. These companies specialize in debt relief — meaning they likely know about programs, incentives, tips and tricks that you might not be aware of.
Negotiate on your behalf. Rather than dealing with the IRS yourself, debt relief services negotiate your debts on your behalf.
Efficient help. Debt relief services are designed to help you understand your situation and resolve it efficiently. In other words, you won’t need to chase down balances or deal with the IRS.
Single monthly payment. Some companies can consolidate your debt, making for a single monthly payment that’s lower than the sum of your old payments.
Fees. Regardless of which tax debt relief company you choose, you’ll be charged a fee for their services.
Potential for scams. Some companies prey on those in debt by charging high fees up front or making unrealistic promises without actually taking any action.
Success isn’t guaranteed. While debt relief companies aim to help you make your debt more manageable, there’s no guarantee they’ll be successful.
Money saved could be taxable. If you manage to settle your debt for a lower amount, the value of the reduction can be considered taxable income.
Damage to your credit score. If the IRS files a lien on your debt, your credit score will most likely be negatively impacted.
4 ways to settle tax debt without a third party
It’s possible to solve your tax debt on your own. However, only an offer in compromise will lower the amount you owe — other programs simply change the way you repay your tax debt.
Offers in compromise (OIC)
This tactic allows you to come to an agreement with the IRS to settle your debt for less than the full amount owed. To get started, fill out Form 656, which includes low-income certification guidelines. You must file all required tax returns and pay a $205 application fee. To confirm that you qualify, fill out the offer in compromise prequalification form on the IRS website.
If approved, you will be able to submit a payment as either a lump sum or monthly installments. Any tax refunds you are owed will be applied toward your tax debt, and liens on assets won’t be released until you have paid your OIC in full.
If rejected, you can file an appeal within 30 days by filling out Form 13711.
If you owe less than $100,000 in taxes, interest and penalties, you may be eligible for a 120-day payment extension. You can e-file an extension form for free using the IRS free file option.
This gives you until October 15 of each year to file your return and avoid late filing penalties, which will only increase your tax debt. However, you’ll likely still need to estimate your taxes and pay the amount you owe. If you don’t, there is an underpayment penalty of 0.5% to 1% each month there is a balance owed.
IRS payment plans
Contact the IRS to set up a payment agreement that fits your financial situation. However, you will need to pay interest and a setup fee when you sign up for a payment plan through the IRS.
Short-term payment plan
120 days or less
Amount owed plus accrued penalties and interest
Owe less than $100,000 in combined tax, penalties and interest
Long-term payment plan
120 days or more, paid in monthly installments
Automatic direct debits: $31 for an online application or $107 for a phone, mail or in-person application
Manual payments: $149 for an online application or $225 for a phone, mail or in-person application
Amount owed plus accrued penalties and interest
Owe less than $50,000 in combined tax, penalties and interest
Setup fees for long-term payment plans are waived for low-income applicants who opt for direct debit. There is a $43 setup fee for low-income applicants who choose manual repayments.
Currently Not Collectible (CNC) status
In the event of a financial hardship that leaves you unable to repay your debt, you may be eligible for CNC status. This pauses any active collections against you.
Your debt won’t be forgiven, but it will allow you to temporarily stop making payments. Interest and penalties will continue to accrue during this time.
To qualify, you will likely need to fill out multiple forms — Form 433-F, Form 433-A or Form 433-B — and prove that you’re facing financial hardship.
What happens if I don’t pay back the IRS?
If you avoid repaying your tax debt for long enough, there are a handful of consequences that could make things even more complicated:
Wage garnishment. If you don’t come to an agreement with the IRS, your wages may be garnished until your debts are paid off.
Interest and penalties. You’ll likely be charged a failure to pay penalty, which is 0.5% of your debt for each month after the due date — up to a total of 25% of the amount of your debt.
Tax lien on your property. The IRS can file a federal tax lien, which gives them claim to your property and notifies credit agencies, which will likely hurt your credit score.
Levied assets. The IRS can levy your assets, which means they can seize bank accounts, retirement income and property, then sell them to settle your tax debt.
Jail time. In extreme cases, you could be prosecuted for tax fraud if you deliberately avoid repaying your tax debts.
How to identify a tax debt relief scam
People in tax debt are often targeted by scammers looking to take advantage of their vulnerability. But there are a few ways to identify a tax debt relief scam, including:
No track record. Reputable tax debt relief companies will often have testimonials, reviews and an online presence that you can use to verify their claims.
Upfront fees. Most legitimate tax debt relief companies won’t ask for fees up front, or will only ask for a small amount.
Contacts you first. Avoid companies that reach out to you by phone, email or mail.
Ignores your financial situation. Be wary if a company claims to know how to help you without knowing about your financial situation.
Makes unreasonable promises. Watch out for companies that make big promises like guaranteed success, waived penalties and other claims.
Delays your case. Be careful if you find that a company keeps creating delays, as they could be giving you the run around while your debt accumulates.
No local office. While it’s possible for companies to operate remotely, it’s safer to choose a tax debt relief company with a local office so you can verify that it’s legitimate.
Tax debt relief companies can help reduce the amount of back taxes you owe the government, but they’re not the only answer. If you’re willing to negotiate with the IRS, there are a handful of ways you can solve tax debt on your own.
Find out more about tax debt relief with these answers to common questions.
Yes, there is a 10-year statute of limitations on IRS collections when it must stop trying to collect taxes. However, deliberately avoiding the IRS could have negative consequences, including jail time.
It depends on the situation. Your credit score most likely won’t be affected unless the IRS files a tax lien on your debt. In most cases, tax debt and tax debt settlements aren’t reported to credit bureaus.
No, but the IRS will collect debts from an estate before distributing assets to beneficiaries.
If you’re in tax debt due to a spouse’s improper tax filings, innocent spouse relief could relieve you of the responsibility to pay. To get started, visit the IRS website and fill out Form 8857. This is available to current and former spouses who improperly filed.
Peter Carleton is a writer that covers banking and investing, breaking down what you need to know about where you put your money. When Peter's not thinking about cutting-edge banking apps and robo-advisors, he runs a creative agency and spends his spare time cooking or reading.
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