Four Sure-Fire Ways To Get Out From Under IRS Debt

Americans end up owing thousands of dollars in unpaid taxes for many reasons: illness, an honest mistake, financial troubles, the "too busy to file" excuse, or a moral stance against taxes.

But like the Grim Reaper, the IRS catches up to each indebted taxpayer sooner or later.

The IRS plays hardball, and can encumber your real estate with liens, freeze and siphon bank accounts, and attach wages. The IRS has sanctioned four strategic options to help you get out from under this heavy burden, which a skilled tax attorney can help you assess.

But in order to work from a clean slate, you must first review all financial records for the tax years in question, then file corrected returns. Often, these restated tax returns show an amount that is far lower than what the IRS is asking.

The first rule in dealing with tax debt is to stop ignoring the problem. Otherwise, it will only get worse as interest charges and penalties mount.

As soon as you receive any IRS correspondence about debt, it's time to act. File corrected returns for the tax years in question. Assess your entire financial situation, including all other debts owed, to determine your repayment options.

This sets the table for four options to finally discharge your total tax debt:

1. Filing for bankruptcy

For those facing the direst of financial dilemmas, including debts owed to parties other than the IRS, the best option might be filing for bankruptcy.

Many individuals with outstanding tax debt will not qualify to discharge their tax debt in bankruptcy due to the stringent requirements.

First, to meet the strict rules of this option, you must have a clean criminal record, free of any fraud or tax evasion convictions. Second, you must have filed the tax returns on time for the years you wish to discharge.

If you requested an extension to file that tax return, even if the extension was granted and you complied with the deadline of the extension you were granted, you do not qualify for discharge of that tax debt in bankruptcy.

Third, the tax debt must be at least three years old. Finally, you must wait a minimum amount of time after the income tax debt is assessed by the IRS to file your bankruptcy petition.

If you do qualify, only tax debts from income taxes can be discharged. Bankruptcy is not for businesses owing payroll taxes.

Even if the tax debt does not get discharged, bankruptcy can also be used as a tool to limit the IRS's collection options while you to reorganize your finances.

The downside is years of damage to your credit. It is possible to recover from that hit to your credit, though. If your tax debt is part of a larger, dire debt picture, bankruptcy can make sense.

Choose wisely, though, because bankruptcy will bar you from selecting any other option under the IRS's "Fresh Start Program," designed to help taxpayers settle their tax debts.

2. Paying off a reduced tax debt in installments

Under the Fresh Start Program, a kinder, gentler IRS is willing to compromise. In many cases, the agency will accept less than the full amount owed and even work out payment arrangements.

Tax debtors of meager means can get on an IRS installment plan or negotiate a reduced debt payoff, especially if they have no property, no money in the bank, and minimal employment.

The IRS, recognizing that something is better than nothing, is willing to work with tax debtors who it recognizes will not be able to pay off the debt within a reasonable amount of time otherwise.

3. Paying off a reduced debt all at once

This option is akin to ripping off the Band-Aid by settling your IRS debt in one fell swoop. The agency will accept a lesser amount in exchange for getting the money upfront. This option only works for those who have the means or the borrowing power to come up with a large lump sum to pay off their renegotiated debt all at once.

The details must be worked out with the IRS, which has wide latitude to accept or reject proposed deals based on individual circumstances and its own calculations of ability to pay.

This is a good option for a taxpayer who made a one-time mistake and who possesses the assets to wipe the slate clean.

4. Paying off the full debt over time

Most IRS tax debtors fall in the middle, between a person of high means and meager means.

For this group, the IRS is willing to stretch out payments up to seven years. In return, the agency wants the full amount paid.

This option allows tax debtors to pay off a substantial amount, while avoiding bank account seizures, tax liens and wage attachments. The taxpayer and the IRS negotiate a payment plan that typically involves a set monthly sum being drafted from a bank account, similar to a mortgage payment.

The only catch is, there's no room for error. Missing even one installment payment can cancel the plan, forcing the tax debtor to renegotiate with the agency. And the IRS might not approve another payment plan the second time around.

If approved for this plan, you must follow through. But at the end of the term, your tax debt disappears.

That is the ultimate goal of each of these options: To finally stop ducking the IRS and get out from under your debt, once and for all.