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How To Pay Off Tax Debt

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Innocent Spouse Tax Relief

How to Pay Off Debt

Did you know that you may be able to get off the hook for a tax bill if you can be deemed an innocent spouse? If you file joint tax returns with your spouse and end up with a huge tax bill, you may be eligible for this program.

There are three types of assistance that can fall under this category:

  • Innocent Spouse Relief
  • Equitable Relief

Innocent Spouse Relief

Innocent Spouse Relief offers you tax burden relief if your spouse failed to report income. It also applies if your spouse reported income improperly or claimed improper deductions or credits.

The Separation of Liability Relief program applies if youre legally separated or divorced from your spouse. This program helps ensure that your ex spouses tax burdens remain his or her own.

Equitable Relief

The Equitable Relief program can apply when you dont qualify for the other two programs. Again, an improper reporting incident needs to exist. Also, you should generally be able to attribute that incident to your spouse or ex-spouse.

These types of program help protect you from underhanded tax dealings on the part of your spouse or ex-spouse.

Because there are so many intricate details to these types of programs, you should consider consulting a tax debt attorney.

Option #: Enter Into An Installment Agreement With The Irs

This should be a distant fourth option if you cant obtain financing or credit for paying off tax debt. The IRS, despite being the administrative body for tax collection, doesnt actually have the power to waive interest and penalties. Installment plans often take years to complete.

Heres what you need to enter into an installment agreement:

  • Tax debt of less than $50,000
  • Valid email address
  • Social Security or tax ID number
  • Bank account to debit payments from

What Can I Do To Repay My Income Tax Debt

Get a clear picture of what you owe

The first step is to get on top of your tax situation by completing and submitting all outstanding tax returns. It might seem overwhelming, but once you see exactly what you owe, you will be better prepared to figure out how to manage your debt.

Communicate with the CRA

Once you have a clear idea of how much tax debt you owe, contact the CRA and establish a payment schedule that you can afford. The CRA will charge interest on the remaining balance at a rate of 5%.

Should you get a loan to pay your tax debt?

The CRA encourages taxpayers to either reduce their expenses or borrow funds to pay off their tax debt. But should you consider going into more debt to pay off your tax debt? The CRA charges 5% on late payments , which may cost less than what most lenders can offer you. Try to avoid paying off tax debt with a high-interest loan as it can create more financial problems later on.

Apply for taxpayer relief

If you cant pay your tax debt due to events beyond your control, like a serious illness, natural disaster or loss of employment, you may apply for tax relief and see if you qualify to have penalties or interest cancelled or waived. You may also need to engage the services of a tax lawyer to assist you with this application.

What if I cant afford to repay my tax debt?

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How Can I Settle My Tax Debt

Four common reasonable collection alternatives are recognized by courts: payment in full, an installment agreement, an offer in compromise, and a temporary delay of collection.Payment in full means exactly what it sounds like, while installment agreements and offers in compromise are ways of paying down your tax debt.

If you are current on all your tax returns and your debt is manageable but you just need a little more time to pay it off you can request an installment agreement. With this method, you can make payments each month until your debt has been satisfied. However, you will have to pay a fee to set up the plan, and you will also have to pay interest and a late penalty.

Exceptions To Underpayment Of Tax Penalties

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If you underpaid your taxes this year but owed considerably less last year, you typically dont pay a penalty for underpayment of tax if you withheld at least as much as you owed last year. That, of course, is only true if you pay by the due date this year.

TaxAct can help determine if the safe harbor rule reduces your penalties and interest. Simply enter last years tax liability and the software will do the calculations for you.

You may also reduce your penalties and interest using the annualized income method if you received more of your income in the latter part of the year.

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What Happens If You Owe Taxes And Cant Pay

Other IRS charges will include interest on the balance and penalties if payments arent made within a month. Your chances of being able to get an installment agreement if you owe $50,000 or less in combined taxes, interest, and penalties increased. Form 95465 asks for a payment plan so your balance can be paid.

Select A Payment Option

Your initial payment will vary based on your offer and the payment option you choose:

  • Lump Sum Cash: Submit an initial payment of 20 percent of the total offer amount with your application. If your offer is accepted, you will receive written confirmation. Any remaining balance due on the offer is paid in five or fewer payments.
  • Periodic Payment: Submit your initial payment with your application. Continue to pay the remaining balance in monthly installments while the IRS considers your offer. If accepted, continue to pay monthly until it is paid in full.

If you meet the Low Income Certification guidelines, you do not have to send the application fee or the initial payment and you will not need to make monthly installments during the evaluation of your offer. See your application package for details.

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Filing Your Taxes Late

If you are not going to be able to file your tax return by the deadline, you should file an extension of time to file by submitting Form 4868 to the IRS by the due date .

It is important to note that filing this form does not give you an extension on the time to pay your tax liability. You’re still expected to send any money you owe by the deadline.

Even if you file a Form 4868, you will need to be certain that your tax liability has been paid .

If you file your tax return lateor fail to file at allyou will be subject to failure-to-file penalties. These charges accrue on returns that have not been filed by the due date .

The charges accrue at a rate of 5% of the unpaid taxes for each month or part of a month that a tax return is late. The charges max out after five months, at which point the failure-to-file penalty is 25% of the unpaid tax liability.

If your return is filed more than 60 days after the due date , the minimum failure-to-file penalty is $435 or 100% of your total tax liability , whichever is smaller.

As you can see, filing late does not pay off, with or without an extension. Even if you do not have the funds to pay your outstanding tax liability by the due date, you should still file your tax return so you don’t incur extra failure-to-file penalties on top of failure-to-pay penalties and interest.

Pay As Quickly As Possible

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If you owe tax that may be subject to penalties and interest, dont wait until the filing deadline to file your return.

Send an estimated tax payment or file early and pay as much tax as you can.

Even if you choose to file an extension, any taxes owed are still due on the filing deadline. Therefore if you dont pay by April 17, you are subject to those extra penalties and fees.

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Do You Owe The Irs Money Here Are Some Things You Need To Know:

Owing the government tax money can be a daunting prospect, but understanding the basics is one way to make the process a little easier. There are a few different ways to find out how much you owe the IRS, including online, by phone, at an IRS office, or by mail. The IRS has many options to help you pay your tax debt, including reducing the debt through filing, or correcting, an already filed tax return. If it becomes too much, dont hesitate to get help from a professional.

Will The Irs Ever Forgive Or Negotiate Tax Debt

It is within the IRS best interests to efficiently collect tax on behalf of the government, encourage voluntary compliance, and promote reasonable fairness and consistency. To that end, the IRS does allow certain taxpayers to negotiate their debt to mutually benefit the IRS collection goals and the taxpayers reasonable ability to pay. While the IRS will not traditionally forgive debt, they are willing to negotiate. Because of that fact, debt settlement and resolution remain important assets for taxpayers looking for much needed relief for their situation.

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Pay Off The Balance In Full

The easiest way to get out of tax debt is simply to pay off what you owe in full. If you miscalculated your withholdings for the year, recognized certain gains, or something else, and you now realize you owe the IRS, making a full payment can be the easiest way to avoid fees and further issues.

However, this option may be easier said than done for many taxpayers. It usually only works for taxpayers who can afford to repay their balance right away and for whom the tax debt was merely a mistake.

If your outstanding tax debt was not an accident, it may not be possible for you to make a large payment all at once. In this case, youll need to formulate a plan to pay off the debt in a reasonable way.

What Happens When You Ignore Irs Collections

How to Pay Off Tax Debt

Whether youre on an installment agreement or working on applying for an offer-in-compromise or CNC status, its crucial to stay in touch with the IRS and never ignore notices you receive about your past-due balance.

Ignoring IRS notices can lead to some pretty severe consequences. Heres a step-by-step look at what happens when you ignore an IRS collection notice.

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How Does Taxpayer Relief Initiative Work

The Taxpayer Relieve Initiative works by extending the time that taxpayers have to pay off their tax debts. There are several ways they have accomplished this.Rather than 120 days, you have 180 days to pay off short term plans.If you owe less than $250,000 you can set up a payment plan either short or long term without having to show financial reasons why you need it.If you pay your payment using direct debit, you can adjust the payment amount as well as the due date.If you have a tax bill that is less than $250,000 from 2019, you may be able to qualify for an installment agreement without the IRS filing a notice of federal tax lien.

How To Pay Off Your Debts

In order to pay off all your debts and become debt free, you must start off by identifying and listing all of them down. This can include:

  • Mortgages
  • Personal loans
  • Car loans

After identifying your debts, you must devise strategies to pay off these loans. According to CRA, the following steps can be followed in order to pay off your debts effectively:

  • Review your budget
  • Prioritize the loans you want to pay off first
  • Close accounts on debts you have paid off.
  • Avoid taking on more debt!

For more information, visit our website and book a free consultation with experts.

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How Debt Hurts Your Credit Score


Your account balance should comprise less than 30% of your credit limit. If your credit limit is $20,000, you dont want your balance to be greater than $6,000. Debt can make your balance skyrocket, which will hurt your score.

In addition, if you amass too much debt and pay your credit card bill late or are unable to pay it, this will hurt your payment history and further impact your credit.

Get On A Payment Plan

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If you havent already, go ahead and apply for an IRS payment plan. If youre not sure whether to go with a short-term or long-term payment plan, it all comes down to your income and how soon you think you can knock out your debt. But work with your tax advisor to figure out your best option. Even if you decide to pay long-term monthly installments, you can always revise your current plan to pay more each month .

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Should You Pay Off Your Debt Or Invest

The rule of thumb is: If you can earn more on your investments than your debts will cost you in interest, maybe it makes more sense to invest. Our suggestion is to pay off that high-interest debt before gambling on risky investments, though. Its also important to consider if high-risk investing and spending is what got you into debt in the first place. If thats the case, debt payoff sounds like the way to go.

Dont Let A Tax Debt Put You In A Spin

Whether youre running a business or are just an individual trying to make ends meet, there is nothing worse than finding yourself in a situation where you have a tax debt owing to the ATO, which most likely will also be accruing a general interest charge and perhaps even a shortfall interest charge.

The Australian tax system operates under a system of self-assessment, and this applies regardless of the type of tax being assessed, whether that is GST, FBT or income tax. However even with the guidance available from tax professionals like ourselves, it is not unheard of for taxpayers to still face the prospect of being saddled with a tax debt thats still on hand long after its due date. This can be brought about due to cash flow difficulties or perhaps the effects of personal hardship. Each unfortunate circumstance can prevent affected taxpayers from meeting their obligations on time, ending up with them carrying the tax debt.

Missing a tax deadline will lead to the resulting outstanding debt being subject to the ATOs general interest charge . The current rate of interest charged is 8.76% . We can seek to have such interest charges remitted in certain circumstances .

Lets be clear. The ATO takes debt collection very seriously, as there is substantial revenue at stake. A report last year from the Inspector-General of Taxation on debt collection highlighted that collectable tax debt had grown to more than $20 billion in 2013-14.


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Is Paying Off Tax Debt With A Loan The Right Choice

As with all personal finance decisions, the right choice depends entirely on your unique situation. To determine if using a personal loan to pay off your tax debt is right for you, consider the pros and cons below.


  • Affordable Payments. With a personal loan, youll be able to pay off the CRA right away and then make affordable payments to your lender each month. No added stress about owing money to the government.
  • Flexible Loan Terms. Personal loans tend to have terms anywhere between one and several years, depending on the lender.
  • Variable Loan Amounts. As with the loan terms, the loan amounts are very flexible. You should be able to get the amount you need to cover your tax bill.


  • Hidden Fees. The terms and conditions of a loan can have a lot of hidden fees. Make sure to read the agreement in its entirety before accepting it, otherwise, you could end up paying more than you budgeted for.
  • Be Realistic. If you cant afford the cost of a loan right now, do not take out a loan. Taking out debt that you cant afford could result in a nasty cycle of debt.
  • Potentially High-Interest Rates. High-interest rates are always a possibility, especially when credit scores are involved. Be sure to compare multiple options to ensure you get the lowest interest rate possible.

Additional Reading

Currently Not Collectible Status

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So what happens if you cant afford to pay your tax debt, but the IRS wont agree to an offer-in-compromise? In that case, your best bet may be letting the 10-year statute of limitations for debt collection run its course.

You can avoid having the IRS levy your wages and bank accounts and pursue other collection methods during this time by getting your debt placed into currently not collectible status.

To get CNC status, you have to demonstrate to the IRS that you cannot pay reasonable living expenses and your tax debt at the same time. Like with an offer-in-compromise, the IRS requires extensive financial information and supporting documentation. And theyll refuse to grant CNC status if they believe you have assets that could be sold to pay the debt.

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Irs Payment Plans: How To Pay Off Debt Over Time

When a taxpayer has a balance due with the IRS, they have until a set date to pay it off before penalties accumulate, and interest is calculated. At that point, the overdue balance continues to grow slowly until it is entirely paid off.

However, taxpayers dont need to pay off all their debt at once. The IRS offers a variety of payment plans to help taxpayers pay their debt off over time. These payment plans offer a flexible long-term solution for many struggling to make ends meet yet hoping for a chance to pay their debt off.

Furthermore, taxpayers who would otherwise take years of monthly payments to whittle down their debt has the option of contacting the IRS and negotiating an Offer in Compromise, if they can prove that their reasonable collection potential within the next two years is not enough to cover their total tax debt. An Offer in Compromise helps taxpayers unable to pay the entirety of their tax debt within a reasonable period negotiate for a reduced tax liability that they can pay.

Alternatively, taxpayers burdened by excessive collection attempts, and no means to begin a payment plan can contact a tax professional to help earn the Currently Not Collectible status, halting efforts to collect temporarily. Here is everything you might want to know about paying your tax debt with the IRS.

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