Do not simply withdraw funds from your plan. “I think a lot of folks take it out as a taxable distribution, which makes things considerably worse,” Gibson explained.
If paying off the debt right away is not an option, taxpayers can set up an installment payment plan with the IRS for up to 72 months to address the problem. For balances of less than $10,000, you can set it up yourself at irs.gov without disclosing any financial information. If your debt exceeds that amount, you must provide the IRS with details about your monthly income and expenses.
“In many cases, consumers can just do it themselves on the IRS website,” Winstead added. “However, if it’s too much for them, they should consult with a lawyer or a tax representative.”
People who can’t afford guidance can get it for free through organizations such as the University of Maryland’s low-income taxpayer clinic, which Winstead helps manage.
In extremely desperate financial situations, taxpayers who believe they cannot pay a tax bill might make an “offer in compromise” to the IRS. It is essentially a request for the sum owed to be reduced. Be wary of companies who claim to be able to settle tax debt for pennies on the dollar. The IRS will require dire circumstances to agree to a tax debt reduction.
Catastrophic medical bills, a job loss, or unemployed family members relying on you may all qualify. However, if you still have a solid job, your prospects will be minor. “The IRS is unlikely to make a deal with a high-earning doctor or dentist,” Gibson added.
According to IRS data, the IRS received 54,225 compromise proposals from taxpayers in 2019 and accepted 17,890 of them. To make an offer, you must be current on your tax filings and have paid your projected taxes for the current year.
The IRS is not callous, but its decision will determine how recoverable your debt appears to be and how unique your circumstances are. “At the end of the day,” Winstead said, “it will rely on how much disposable income you have and how much equity and assets you own to pay down the debt.”
Because the IRS has been more indulgent with taxpayers throughout the pandemic, she stated that now is the time to address the issue. That could change.
“I suspect they’ll go back to more conventional collecting tactics as we get out of this,” Winstead said. “Now is the moment to take a step in the right path if you have unresolved difficulties with the IRS.”
