What To Do If You Owe The IRS

July 09, 2015

One of the biggest fears of many Americans is getting audited by the IRS. Even worse, is finding out that you owe thousands of dollars in back taxes that you can’t pay. That’s the position that one of my recent helpline callers was in. Not only could she not afford to pay the debt in full, but the balance was actually increasing since the interest and penalties each month were considerably more than she was paying. If you find yourself in a similar situation, here are some options to consider:

1) Work out an installment plan. Contact the IRS immediately and see if you can arrange an affordable monthly payment plan. Under the new IRS “Fresh Start” plan, you can automatically have up to 72 months to pay off up to $50k. If you owe more than $50k, you can still try to negotiate a payment plan. Either way, you must be current on this year’s tax returns and be aware that you’ll still owe interest and penalties of generally 8-10% a year.

2) Negotiate an “offer in compromise.” If you can’t afford an installment plan, try to negotiate to settle the debt, which is called an “offer in compromise.” There’s no guarantee that you’ll be successful though. You can use this tool to see if you might be eligible.

3) Refinance the debt. If neither of those options work for you, look for ways to refinance the debt with a lower interest source of credit. In some cases, even paying it off with a credit card might be cheaper. Other options include home equity loans or lines of credit (which may be tax-deductible but you’re putting your home on the line), personal loans from family or friends or “peer-to-peer” loans on sites like Lending Club and Prosper. Keep in mind that these options may only make sense if the cost is less than what you’re paying to the IRS in interest and penalties.

No matter which option you choose, the most important thing is to take action. Don’t try to ignore it. As unpleasant as any of these options may sound, you don’t want to fall further behind on your taxes. After all, who really wants to be on the bad side of the IRS?