No, you can’t get rid of your tax debt for pennies on the dollar

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For many Americans, tax season is over. Their federal tax returns are in and they’ve made vacation plans knowing they can pay for their fun in the sun with a big refund.

But there are those who must. For them, there is the ticking time bomb of their tax debt, plus the added burden of interest and penalties. Knowing they can’t find what they need, they didn’t file. They take the risk that their tax delinquency goes unnoticed, at least until they know how to pay.

Yet with each passing day, their tax debt increases. The IRS imposes a penalty if they do not file and another if they do not pay. And, by the way, interest accrues in addition to penalties.

Fearing the worst – that is, the IRS coming to garnish their wages or go after their homes or other assets – many people become desperate and turn to what they think is a Saviour.

You may be surprised how much retirement income is taxed and what isn’t.

“Can’t pay your taxes? asks a radio host. “Do you have $10,000 or more in tax debt? We can help.”

It’s a tantalizing pitch: A tax debt relief company claims its “qualified” agents (or even attorneys) can make a deal with the IRS so you pay less than you owe.

But that’s hype. Don’t. Don’t make the call. Do not complete the online profile. If you do, you’ll likely increase your anxiety because you’ll end up paying the company hundreds or even thousands of dollars for something you could have done yourself. Or worse, the tax debt relief company is a complete scam, and they will take your money and do nothing.

Based on interviews with people who have gone this route, here’s what happens. You call. They take your information and you send them documents – W-2s, 1099s, etc. Then you wait. And wait. And wait. You remember. You are told that they are processing your application or waiting for a response from the IRS. You call again, but this time no one can tell you why it’s taking you so long to get relief.

You got played. And the money you spent could have been used to pay off your tax debt.

When is it morally right to avoid debt?

What tax debtors don’t know is that the “one hundred percent” deal companies claim they can get involves what’s called an “offer in compromise,” or OIC. Although this is a legitimate program offered by the IRS, it is intended to help people who are so financially depressed that the agency is unlikely to be able to collect all that the government owes.

Tax debt relief companies often fail to adequately disclose that accepting an ICO is a herculean process. To qualify, the IRS will look at your income, expenses, ability to pay, and most importantly, if you have any assets, including the equity in your home.

You can apply for an ICO yourself. On irs.gov, search for the “Offer in Compromise Qualifier” tool to see if you are eligible. You will see that the first few questions could eliminate a lot of people. You cannot be involved in an open bankruptcy proceeding. You must have filed all required federal tax returns.

If the results indicate that you are not eligible, contact the IRS anyway. You can always argue that you have extenuating circumstances – like a serious illness – that prevent you from paying your taxes in full.

The other option is to request a payment plan. I have helped several people overcome their fear and call the IRS to set up an installment arrangement. You can arrange to make monthly payments for up to six years if you owe $50,000 or less in taxes, penalties and interest combined and have filed all required tax returns.

Use the online payment agreement tool at irs.gov. If you don’t have Internet access, complete IRS Form 9465 “Installment Agreement.” If you owe more than $50,000 or need more than six years, the IRS could still work with you to set up a payment plan, an IRS spokesperson said.

If your financial situation is really bad – you’ve lost your job and barely put food on the table – you can request that your account be placed in “Currently Uncollectible” status. The IRS will temporarily delay collection until your financial situation improves. However, interest and penalties continue to accumulate. The Taxpayer Advocate Service has a good explainer of this process. Here is the link: https://taxpayeradvocate.irs.gov/get-help/currently-not-collectible.

In tax debt? Don’t be fooled by the promise of an easy fix. Yes, Uncle Sam’s gathering powers are no joke. But don’t pay for services you can get for free by dealing directly with the IRS.

What you don’t know about Social Security could cost you dearly

How to live in retirement without breaking the bank before you die

Want to leverage the equity in your home? Read this first.

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