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Each year, millions of taxpayers find themselves unable to pay what they owe to the Internal Revenue Service (IRS). But when you owe back taxes to the IRS, the initial balance isn’t the only issue. The interest and penalties will also compound over time, so even a modest tax debt can quickly turn into an overwhelming financial burden. And, if you have unpaid taxes right now, at a time when borrowing rates are high, living costs are rising and the turbulent economy is causing other financial issues, it could be tough to find room in your budget to pay it all off.
The IRS can also be pretty aggressive when it comes to collecting unpaid taxes, which can further complicate the issue. From wage garnishments to property liens and levies, the federal agency has an array of enforcement tools it can use to try and collect once a tax debt goes unpaid. But what many taxpayers don’t realize is that there are also programs in place that could help to reduce, restructure or pause repayment of your tax debt. And, taking advantage of one of those programs could help curb collection attempts by one of the most aggressive creditors around.
Still, navigating these programs can be tricky between the eligibility requirements and the paperwork, and if you’re trying to use them to deal with past-due debt, specifically, it’s important to know whether any of these solutions can help. So will tax relief help with overdue debt?
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Does tax relief help with past-due debt?
Yes, tax relief can be a powerful tool for resolving your past-due IRS debt, especially when it’s not possible to repay the full balance right away. The IRS offers several formal programs designed to help taxpayers reduce or manage what they owe. These include:
- Installment agreements: If you can’t pay your tax debt in full, the IRS may allow you to pay it off in monthly installments. These plans help prevent further collection actions, as long as you stay current with payments.
- Offer in Compromise (OIC): This option allows qualified taxpayers to settle their tax debt for less than the full amount they owe. To be approved, you’ll need to demonstrate that paying the full debt would create financial hardship. But while it’s not easy to qualify, this option can offer significant relief for those in difficult circumstances.
- Currently Not Collectible (CNC) status: If your financial situation is dire — for example, you’re unemployed or living below the poverty line — the IRS may temporarily halt collection efforts. While interest and penalties will still accrue, Currently Not Collectible status gives you breathing room to get back on your feet.
- Penalty abatement: In some cases, the IRS will remove or reduce penalties, though this is often limited to those facing this issue for the first time or those who can show reasonable cause (like a serious illness or natural disaster) for falling behind.
All of these programs can either reduce the total amount you owe, pause collection efforts or make payments more manageable, which, in practical terms, helps with past-due tax debt. But success depends on your financial profile, the completeness of your application and your willingness to stay compliant with current and future tax obligations.
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What to consider before seeking tax relief
While tax relief programs can be helpful, they’re not a solution for every situation, and there are important trade-offs to be aware of before pursuing them. Here’s what to know:
Relief doesn’t mean forgiveness. Except in rare cases like an accepted Offer in Compromise, most IRS relief options don’t eliminate your debt; they simply make repayment easier. With installment agreements or CNC status, for example, you still owe the full balance, and interest continues to accrue until it’s paid off.
Your credit isn’t directly impacted, but other consequences may follow. Unlike private debts, IRS actions typically don’t show up on your credit report. But that doesn’t mean there’s no fallout. Liens, levies or wage garnishments can hurt your financial stability and make it difficult to get approved for new credit, loans or even some jobs.
Scams can be an issue. Some tax relief companies advertise promises that sound too good to be true and often are. While many legitimate firms do offer real assistance, others charge high fees without delivering results. If you decide to seek outside help, look for tax relief companies that employ licensed tax attorneys, enrolled agents or certified public accountants with experience in IRS negotiations.
You need to stay compliant going forward. Once you enter into a tax relief program, the IRS expects you to keep up with future tax obligations — no skipping filings, and no missed payments. Falling out of compliance can void the relief arrangement and leave you worse off than when you started.
The bottom line
If you’re struggling with past-due IRS debt, tax relief can be a legitimate and effective way to get back on track, but there are caveats. While these programs can reduce your total balance, stop collection actions or make your payments more manageable, whether or not they’re the right solution for you depends on your circumstances. Success also generally hinges on understanding the options, applying correctly and staying current with your taxes from this point forward.
For those who qualify, though, programs like Offers in Compromise and penalty abatement can offer substantial savings. And even if you don’t qualify for a tax debt reduction, simply spreading payments over time through an installment agreement can provide much-needed breathing room. With the right strategy, it’s possible to regain control of your finances and leave your past-due tax debt behind for good.
