1. Prioritize and pay it off ASAP
We don’t expect you to pay off your debt all at once — but try to pay off the bulk of it immediately, if you can, and then pay the remainder within four months or less.
The IRS site says its short-term payment plan applies to someone who owes less than $100,000 in combined tax, penalties and interest.
There’s no set-up fee, but you will add up on interest until your balance is paid off and penalties for missed payments, much like you would on a credit card or loan.
The IRS also recommends looking into a loan or using a credit card if you can to pay off your taxes in full, as opposed to a payment plan. Getting a loan with a low interest rate can be more manageable than an IRS agreement, which compounds interest daily.
We’d normally never recommend adding to your credit card debt, but a balance transfer credit card with a 0% APR offer might help buy you some time and save you some interest.
2. Make your minimum payments
No matter what plan you choose, if you don’t make your minimum payments on time, you risk accruing some hefty penalties and interest.
Your next stimulus check might help you manage your monthly installments, or even pay more than the minimum, getting you another step closer to shrinking your debt load.
If you can’t afford the minimum payment the IRS offers, you might be eligible for a longer-term payment plan or an agreement where you end paying a smaller amount than you initially owed.
3. Consider a long-term agreement
An installment agreement, or long-term payment plan, costs more than a short-term agreement, but makes sense if you owe $50,000 or less in tax, penalties and interest and need more time to pay it off. The IRS says you could get up to 72 months to pay off your debt with a streamlined agreement.
If you pay monthly via automatic withdrawals or direct debit, there’s a $31 set-up fee involved, unless you’re considered a low-income taxpayer. Direct debit is also required if your balance owing is over $25,000.
If you pay your monthly fees without authorizing direct debit, you’ll need to pay a $149 fee. The fee is $43 fee if you’re low-income and it might be reimbursed if you meet certain requirements. You can pay from your checking or savings account, or with a credit card or check.
The IRS also notes that set-up fees may be cheaper if you apply online instead of by phone, mail or in-person.
4. Apply for an offer-in-compromise
An offer-in-compromise is basically an agreement that gets you some tax relief if you can’t pay off your dues. The IRA looks at your ability to pay, as well as your income, expenses and asset equity.
It isn’t that easy to qualify for, however. You won’t be eligible for this if you haven’t filed all the required tax returns, haven’t made your required payments or if you’re currently in a bankruptcy proceeding. There’s also a non-refundable $205 application fee tacked on.
Along with your application, you’ll need to select a payment option.
You could pay a lump sum of 20% of the offer you submit, and if you get accepted, you can pay the remainder on your offer in five or fewer installments.
If you choose the periodic payment option, you’ll need to submit your initial payment and continue to pay off the rest of your balance in monthly installments even while the IRS considers your offer.
The only exception is for low-income taxpayers, who don’t need to pay the application fee, make an initial payment or submit monthly payments while their offer gets considered.
5. When in doubt, talk to an expert
Still feeling a little lost on what path might be best for you? Consider hiring a financial advisor to help you figure out the best way to deal with your tax debt.
There are plenty of reliable experts and fiduciaries — financial experts with legal obligations to act in your best interests — out there.
Online services like Facet Wealth make it easy and accessible to find a certified financial planner who will review your financial history and recommend a plan to help you achieve your goals. Just schedule a free, introductory consultation to get started.
Filing your taxes this year when you have taxes owing from previous years
Bear in mind that you need to file all tax returns that are due, so that includes returns from past years as well.
If you don’t file a past tax return that you still owe money for, you risk losing out on a refund and you might miss out on social security credit or possibly delay loan approvals.
A few more tips to help you be free of tax debt
Monetize your skills and hobbies to supplement your income: It’s always a good idea to bring in extra money if you can, especially if you can capitalize on doing something you enjoy. You can create an account on an online marketplace for freelancers where you can make some extra money on your own schedule using skills you already have.
If you also have student loan debt, make dealing with it a little easier: If you’re still struggling to pay off student loans as well as your tax debt, you could potentially save thousands of dollars in interest by refinancing.
Find savings where you can: Cut back on your streaming services you don't regularly use and get a library card to borrow some free movies and books. You might be doing a lot of your shopping online right now while there are pandemic safety restrictions and you can download a free browser extension that automatically hunts for the best deals and coupons for the things you need.
Revisit your insurance rates: Try and lessen your other monthly expenses in an effort to concentrate on your tax debt. If you haven't thought about your car insurance for a while it might be worth it to look around to see if you can find a better deal. You also might save hundreds on your homeowners insurance by comparing rates to find a lower price.