We’ve all heard the saying, “nothing is certain except death and taxes.” While it might seem morbid, it’s a testament to the unavoidable reality of taxation. However, life’s unpredictability can often result in unforeseen financial challenges, leading some of us into tax debt. If you find yourself in this predicament, don’t despair. Achieving financial freedom is still within reach.
In this blog post, we’ll explore actionable strategies to resolve your tax debt, putting you back on the path to a secure financial future.
Establish A Payment Plan
For many individuals, the mere thought of paying off their entire tax debt at once is overwhelming. The good news? The IRS understands this and often allows taxpayers to pay tax debt in installments. By establishing an installment agreement with the IRS, you commit to a monthly payment amount to gradually reduce your debt over time.
Before you request this agreement, consider these tips:
- Ensure you’ve filed all your tax returns.
- Determine an affordable monthly payment amount based on your current financial situation.
- Stay current on your agreement. Missing payments can void the arrangement.
While paying in installments, remember that interest and penalties will continue to accrue, so it’s beneficial to pay more than the minimum whenever possible.
Consider An Offer In Compromise
An Offer in Compromise (OIC) is a program where you negotiate with the IRS to settle your tax debt for less than you owe. It’s an excellent option for those who genuinely can’t afford their tax liabilities.
However, there are strict requirements:
- You must prove financial hardship.
- All required tax returns must be filed.
- You should be current with your estimated tax payments if you’re a business owner or self-employed.
Seek Professional Help
While the idea of paying someone when you’re already in debt may seem counterintuitive, hiring a tax professional can save you significant money in the long run. Tax attorneys, CPAs, and enrolled agents can provide advice tailored to your situation, negotiate on your behalf with the IRS, and help ensure that you’re making informed decisions.
Look Into Penalty Abatement
If you’ve accrued penalties on top of your tax debt, you might be eligible for a first-time penalty abatement (FTA) waiver. This waiver is available for taxpayers who:
- Have either never incurred a tax penalty or had penalties at least three tax years prior to the current debt.
- Are current with all filing and payment requirements.
- Have arranged to pay any tax due, either in full or through an installment agreement.
Stay Current Moving Forward
Once you’ve addressed your existing tax debt, the next step is to ensure you stay on track in the future. This can be achieved by:
- Budgeting for future tax liabilities.
- Seeking advice before making large financial decisions.
- Filing and paying your taxes on time each year.
Consider Bankruptcy As A Last Resort
While it’s a drastic step, bankruptcy can sometimes discharge certain tax debts. However, there are specific criteria that the tax debt must meet.
Typically, income tax debts might be eligible for discharge in Chapter 7 or Chapter 13 bankruptcy if:
- The tax debt is at least three years old.
- A tax return was filed for the debt at least two years before filing for bankruptcy,
- The tax assessment is at least 240 days old.
- You did not commit fraud or willful evasion.
Do note that not all tax debts are dischargeable, and bankruptcy comes with its own set of challenges. Therefore, this should be seen as a last resort and ideally discussed with a legal professional.
Tax debt can seem daunting, but with the right approach, it’s manageable. By understanding your options and taking proactive steps, you can navigate the path to financial freedom. Whether you’re setting up an installment agreement, seeking professional advice, or even considering more drastic measures, remember that the end goal is to put yourself in a financially secure position.
Taking charge of your financial future requires effort and diligence, but with the strategies outlined in this post, you’ll be well on your way to resolving your tax debt and achieving the peace of mind that comes with financial stability. Stay informed, seek guidance when needed, and remember: financial freedom is a journey, not a destination. Safe travels on your path to a brighter financial tomorrow.