How to Get Rid of Your Back Taxes
Back taxes can be an intimidating financial obstacle to overcome. Not only do you have growing fees as time passes without payment, but you also have interest on top of that, making your debt grow rapidly. However, just because you’re in a precarious situation now, doesn’t mean that you can’t get out of tax debt and back in good standing with the IRS.
Whether you’re behind on taxes because you didn’t realize you were supposed to pay taxes on self-employment income or simply didn’t have the money to take your tax bill, if it’s escalated out of control, your financial anxiety is probably at an all-time high. To help you find a way out of what may seem like an ever-growing financial problem, here are several key steps you can take to get rid of your back taxes.
Step 1: Figure Out Exactly How Much You Owe
The first thing you need to do is figure out exactly how much you owe. Just like paying off your car or preparing for student loan repayment, you need to know where you stand to figure out how to put a plan in place and get your debt paid off as quickly as possible.
How to Get Rid of Your Back Taxes
Gather all the documentation you have regarding your tax debt, which may include tax returns from past years and letters from the IRS. Your previous tax returns will tell you how much your tax bill was for that year—this is the starting point. Keep in mind that if you haven’t yet filed for one or more tax years, you need to do so ASAP.
Once you have your tax bill(s), you’ll then need to calculate the interest and penalties that you owe on top of that. The IRS lays out the interest rates and penalties for not filing or paying your taxes, which you can use to calculate how much you owe.
Step 2: Determine How Much of Your Tax Debt You Can Pay Now
If you can, it’s in your best interest to pay in full to clear your tax debt immediately. However, that’s not possible for most people who find themselves in this situation, especially if the debt has been accumulating for some time.
If you cannot afford to pay it all off upfront, determine how much you can afford to pay in a lump sum—ideally without putting yourself in further debt in other ways. After all, the last thing you need is a mountain of credit card debt to tackle on top of back taxes.
You may need to create a budget to see how much discretionary income you can realistically dedicate to lowering your tax debt as quickly as possible. Keep in mind that making a big dent in your tax debt is essential, otherwise, it will keep growing at a faster rate.
Step 3: Look into Repayment Options for Back Taxes
The IRS wants to collect outstanding tax debts, so they’re typically willing to work with individuals to get the money they’re owed as quickly as possible. As such, they are open to repayment plans.
How to Get Rid of Your Back Taxes
Some of the payment plan options you might have when it comes to repaying your back taxes include:
Offer in Compromise
An Offer in Compromise allows taxpayers to come to an agreement with the IRS to repay back taxes, but for less than the full amount they owe. This option is typically only available to those with extenuating financial circumstances that would prevent them from realistically being able to repay the full amount. However, if you’re like many people who have been laid off or taken a huge financial hit due to the COVID-19 pandemic, this may be an option for you.
Short-Term Installment Plan
You may be able to repay your back taxes in a short-term installment plan over the course of 120 days. This means you can split that tax debt up over 3 monthly payments in order to make it more manageable. To qualify, you must owe $100,000 or less.
Long-Term Installment Plan
Need more than 3 months to pay back taxes? A long-term installment plan (a repayment plan longer than 120 days) allows you to split up lump sum payments over a longer period of time. To qualify for this repayment plan, you must owe $50,000 or less.
In addition to these repayment plans, there may be other options available to you based on how much you owe and your financial circumstances, so make sure to do your research before contacting the IRS to set up terms.
It may also be in your best interest to work with a tax professional who can help you make special arrangements. After all, tax laws can be confusing and the IRS is typically strict with debtors. A tax professional can negotiate on your behalf for the best possible repayment terms and help guide you through the process. However, that comes at a cost, so you’ll need to weigh the pros and cons.
Now that you have a game plan, you can start working toward paying off your tax debt and re-establishing your financial freedom.
