I’ve been working as a freelancer for a few years. Normally, I don’t have a problem paying my taxes on time and in the full amount. But I recently ran into some financial trouble, and now I have tax debt.
What should I do?
Tax debt is serious, so the first thing you may want to do is consult with a lawyer who specializes in tax law. Do not ignore your tax debt. Take steps to start paying it off right now.
Here's the good news: you have many options when it comes to settling your debt.
“Sometimes the easiest way to get tax debt help is through the IRS,” says Randolph Law Firm, P.C. “The IRS offers installment agreements for taxpayers who owe less than $50,000 in combined taxes, penalties, and interest.”
If you simply need a little more time to pay your taxes, you can submit an application for an Online Payment Agreement. The agreement gives you 60-120 days to pay the bill in full. Yes, there will be interest and penalties with this option, but these costs are generally low.
An installment payment plan, which can be applied for online, may be a good option for you if you owe less than $10,000. These plans will usually allow you to pay off the balanced plus interest and penalties over a 36-month period.
In certain situations, an Offer in Compromise may be a good option, but you would have to meet certain criteria for the IRS to approve this measure.
- There must be doubt that the IRS will be able to collect the tax bill from you now or in the foreseeable future.
- There must be exceptional circumstances in which full payment of your tax bill would cause “economic hardship,” or would be considered “unfair” or “inequitable.”
Depending on your situation, using a credit card may be an option. However, it’s important to remember that the interest on this debt would likely exceed any penalties or interest you’d pay through a payment agreement with the IRS. Also, you’ll have to pay an additional credit card processing fee of 1.88%-2.34% which further adds to the cost.
Taking out a short-term loan or re-financing a home may offer lower interest rate compared to using a credit card.
If your debt is insurmountable, then filing for bankruptcy may be a practical and viable option. Both Chapter 7 and Chapter 13 bankruptcy will discharge tax debt if you qualify.
Regardless of which solution you choose, it’s important to remember that you will face additional costs and repercussions. It’s simply a matter of weighing the cost differences between each possible solution and finding a viable solution for you.
Just make sure that you’re not ignoring the IRS. Be cooperative. Make it known that you have every intention of settling your debt.
The only way forward is to face the situation honestly, and to develop a plan to pay off your debt. The worst thing you can do is avoid the issue, as this will give the impression that you have no desire to pay your tax debt.