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Tax debt relief
You can tackle it on your own or hire a third party to help.
While there are many companies that can help you settle up with the government, third parties aren’t the only solution. There are a handful of ways you can get help with your tax debt.
What is tax debt relief?
Tax debt relief is a broad term that covers any incentive, program or service that helps you reduce or eliminate your outstanding tax debts. Some of the more popular methods include:
Tax credit. A credit that’s applied to the amount you owe to reduce your overall debt.
Tax relief service. A company or service designed to help you reduce, repay or eliminate tax debt.
Tax deduction. A reduction in your taxable income that reduces the amount owed to the government.
Tax exclusion. Certain types of income or expenses are exempt from taxes, reducing the amount of tax paid to the government.
Tax debt forgiveness. Programs that allow you to settle debts for a percentage of the original amount.
Is there tax relief at the state level?
Yes. 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 from state to state.
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
Debt relief companies typically charge a percentage of a customer’s debt or a monthly program fee for their services. And they aren’t always transparent about these costs or drawbacks that can negatively affect your credit score. 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.
Pros
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.
Cons
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.
Before you sign up with a debt relief company
Debt relief companies typically charge a percentage of a customer’s debt or a monthly program fee for their services. And they aren’t always transparent about these costs or drawbacks that can negatively affect your credit score. 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.
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 garnishments. 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 also levy your assets, which means they can seize things like wages, bank accounts, retirement income and property, then sell it 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:
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.
Contact you first. Avoid companies that reach out to you by phone, email or mail.
Ignore your financial situation. Be wary if a company claims to know how to help you without knowing about your financial situation.
Make unreasonable promises. Watch out for companies that make big promises like guaranteed success, waived penalties and other claims.
Delay 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.
This tactic allows you to come to an agreement with the IRS to settle your debt for less than the full amount owed.
In the event of a financial hardship that leaves you unable to repay your debt, you may be eligible for CNC status, pausing any active collections against you.
As a last resort, bankruptcy might help you erase debts and get a fresh start. But you risk damaging your credit for anywhere from seven to 10 years.
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.
There’s 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 such as jail time.
If you owe less than $100,000 in taxes, interest and penalties, you may be eligible for a 120-day payment extension.
Bottom line
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.
It depends on the situation. Your credit score most likely won’t be affected unless the IRS files a tax lien on the debt.
No, which is why you’ll need to address it. Speak with the IRS to explore your options or consider a tax debt relief company.
Yes, but not all types of debt. There are also a number of downsides to filing for bankruptcy. Consider consulting a financial adviser or accountant to find out if this option is right for you.
No, but the IRS will collect debts from an estate before distributing assets to beneficiaries.
A tax lien is a last resort that puts a claim on your property to secure tax debt payment. It remains on your credit report for up to 10 years, but you can request credit agencies to remove it once you settle your debt.
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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