Owe the IRS more than you can pay? You may have other options
Owing thousands, or even millions, of dollars to the IRS can feel overwhelming, especially when paying the full amount seems impossible. But there may be ways to resolve tax debt without paying everything at once, and in some circumstances, without paying the entire balance.
One possibility is asking the IRS to accept less than what is owed. However, not everyone qualifies, particularly people who own valuable assets. When that option is unavailable, a payment plan or even bankruptcy may offer another way forward.
Understanding these options can make a significant difference when deciding how to handle serious tax debt.
Can the IRS accept less than what you owe?
Yes, in certain circumstances. The IRS has a program called an Offer in Compromise, which allows qualifying taxpayers to settle their tax debt for less than the full amount owed.
However, it is not as simple as offering to pay half of the debt and hoping the IRS agrees.
The IRS examines a person's financial circumstances, including income, living expenses, debts, and assets. These details help determine whether the taxpayer qualifies and how much the IRS may be willing to accept.
For example, someone who owes $100,000 but owns a valuable property with substantial equity may face a very different situation from someone with the same debt and few assets.
This is why the amount owed is only part of the picture.
What if you own a home but cannot afford your tax debt?
Owning a valuable home can make settling tax debt for less more difficult, even when a person does not have enough cash to pay the IRS.
Consider a taxpayer who accumulated more than $1 million in tax debt after operating a successful business. Although the taxpayer could not simply pay the outstanding balance, the taxpayer also owned a home worth well over $1 million.
Because of the substantial equity in the property, settling the debt for less through an Offer in Compromise was not a practical option.
But that did not mean there was no solution.
A payment plan may help when settling for less is not possible
In the same case, the IRS required the taxpayer to explore borrowing against the home to pay the debt.
The taxpayer approached two banks but was denied financing because of the existing tax problems. Eventually, a payment plan was negotiated with the IRS. The arrangement allowed the taxpayer to make payments even though the entire debt was not expected to be paid before the IRS collection period expired.
As a result, a substantial portion of the tax debt was expected to remain unpaid when the collection deadline passed.
This example illustrates an important point: even when the IRS will not agree to reduce a tax debt through a settlement, a payment arrangement may still provide a workable solution.
Can bankruptcy help with IRS or State Tax debt?
In certain circumstances, bankruptcy may also help people struggling with tax obligations.
For example, one taxpayer had accumulated substantial state tax debt related to gambling while also falling behind on mortgage payments.
A Chapter 13 bankruptcy became part of the solution. Through that process, much of the tax debt and all of the penalties were discharged, and the taxpayer was able to keep the home.
This does not mean bankruptcy automatically eliminates tax debt. Whether taxes can be discharged depends on the circumstances.
However, it demonstrates that bankruptcy may be worth considering when tax problems are combined with other serious financial difficulties.
What should you do if you cannot pay the IRS?
There is no single solution that works for everyone.
Some taxpayers may qualify to settle their debt for less. Others may benefit from a payment arrangement, while bankruptcy could be appropriate in certain situations.
The right approach depends on several factors, including how much is owed, available income, monthly expenses, existing debts, and the value of any property or other assets.
The most important step is understanding which options may actually be available before deciding how to address the debt.
Struggling With Tax Debt? Explore Your Options
If you owe money to the IRS or are facing serious tax problems, you may have more options than you realize.
The Law Office of Louis S. Haskell, located in Lowell, Massachusetts, helps individuals evaluate tax problems and possible solutions based on their financial circumstances.
Call 978-459-8359 to schedule a consultation and discuss your situation.
Disclaimer: This article provides general information and does not constitute legal or tax advice. The availability of any tax resolution option depends on the specific circumstances of each case.
TL;DR
Owing a large amount to the IRS does not mean you have to pay everything immediately.
The IRS may accept less than the full amount owed in certain situations.
Owning a home or other valuable assets can affect your options.
Payment plans and, in some cases, bankruptcy may help resolve tax debt
Not sure what your options are?
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Owe more to the IRS than you can afford? Learn how tax settlements, IRS payment plans, and bankruptcy may help resolve serious tax debt.