Yahoo Finance Ways To Pay Off $10,000 in IRS Debt in Less Than 5 Years
Owing money to the Internal Revenue Service (IRS) is never a good position to be in. Not only can this take a toll on your mental well-being, but it gets even more detrimental to your personal finances due to ever-growing interests. Unforeseen events sometimes derail plans. if that’s you, you aren’t alone.
In 2022, 18.6 million individual taxpayers collectively owed $316 billion in overdue taxes, according to The Wall Street Journal. To pay that debt, experts recommend setting a plan and acting fast to avoid further aggravating your financial situation.
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The IRS itself said in a fact sheet that if you can’t pay the full amount you owe, “don’t panic,” adding you should also not be afraid and not delay filing.
“There aren’t many worse situations than owing money to the IRS,” said Scott Lieberman, founder of Touchdown Money. “If you can’t pay your taxes when they’re due, the IRS will work with you to let you pay over time. However, you’ll pay penalties and interest for any uncollected taxes, so this can add up quickly.”
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First, Make Sure you File your Taxes
First, calculate what you owe and your current financial status, said Erika Kullberg, attorney, personal finance expert and founder of Erika.com.
And if you haven’t already, file any back tax returns you might currently owe.
“The IRS requires getting your ducks in a row before it will agree to any payment plan, and you’ll have a touchstone for knowing your total debt,” she added. “The IRS Online Payment Agreement helps you set up a monthly budget-friendly payment plan.”
It’s important to note that there is a penalty if you fail to file returns, “so you should file timely even if you can’t pay your balance in full,” the IRS noted on its website.
Make a Budget
Another important step is to create a budget and prioritize your expenses to allocate more funds toward paying off the debt, according to Michael Collins, CFA, founder and CEO, WinCap Financial.
Kullberg echoed the sentiment, stressing the importance of making regular payments and eliminating non-essential expenses to create more money to put toward your debt. She added that you should figure out a budget for your monthly income that allocates a set amount each month for IRS payments.
“And then work to earn side income as well as sell any old unused items you don’t need anymore to put more money toward your tax debt and cut down repayment time,” Collins said.
And as Michael Micheletti, consumer finance expert and chief communications officer at Unlock Technologies, noted, the $10,000 total amounts to about $167 a month over five years.
“Many taxpayers can come up with that through a combination of expense-cutting and additional income,” Micheletti said.
Consider “Offers in Compromise”
Another practical tip: if your circumstances lead you to believe you just don’t have the money to pay in full, research an Offer in Compromise (OIC).
“It allows you to settle your tax debt for less than what you owe,” Kullberg said, adding that to do so, you need to establish that paying the full amount would create an ‘economic hardship’. “If you are eligible, you could see a dramatic reduction in what you will actually have to pay. Use the IRS’s Offer in Compromise Pre-Qualifier tool to see if you meet eligibility criteria.”
The IRS said that it generally approves an OIC “when the amount you offer represents the most we can expect to collect within a reasonable period,” according to its website.
You are eligible to apply under certain circumstances, which include:
If you filed all required tax returns and made all required estimated payments
Aren’t in an open bankruptcy proceeding
Have a valid extension for a current year return
Are an employer and made tax deposits for the current and past two quarters before you apply
In 2023, there were 30,163 offers in compromise from taxpayers, and the IRS accepted 12,711 of them — for a total amounting to $214.5 million, according to IRS data.
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Consider Payment Plans
Another helpful thing to keep in mind is that the IRS is often willing to work with people. The IRS can help you set up a short-term or long-term payment plan.
“Short-term plans provide up to 180 days — about six months — to pay the balance; long-term plans provide up to 72 months — six years — to pay the balance,” Micheletti said.
To start, complete an online payment agreement application, he said, adding that you will need to propose a workable monthly payment amount and due date.
“And you’ll still have to pay monthly interest and late-payment penalties,” he said.
Micheletti also noted that you can contact the IRS to discuss your situation at the organization’s free Taxpayer Advocate Service.
Another important point: avoid turning to credit cards.
“While it’s possible to pay IRS tax debt with a credit card, think twice about that,” Micheletti said, noting that current credit card interest rates average more than 20%. “In contrast, the interest rate for most IRS tax debt for individuals is 8%.”
Take a Personal Loan
Another option to tackle this debt — if you have good credit and can qualify for a personal loan at a relatively low rate — is to look into a personal loan.
Micheletti noted, however, that rates are largely dependent on credit and can run from around 8% to 36%.
“A friend or family member might loan you the money, too,” he said. “If you decide on that, get everything in writing – and have full confidence you can adhere to the terms of the agreement,” he added.
Alternatively, you could also access your home’s equity — if you’re a homeowner and have built up equity in your home, consider tapping that for funds to pay your tax bill, he said.
“A home equity loan or home equity line of credit are both loans, so will require qualification based on credit, and loan-to-value and debt-to-income ratios,” he added.
Temporarily Reduce 401(k) Contributions
According to Peter C. Earle, senior economist at the American Institute for Economic Research, reducing your 401k contributions to pay down your tax bill is one strategy worth considering — temporarily.
“Given that IRS debt accrues daily interest and penalties, redirecting a portion of retirement savings toward paying off the tax debt could result in substantial long-term savings by reducing the mushrooming tendency of tax debt,” Earle said.
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This article originally appeared on GOBankingRates.com: Ways To Pay Off $10,000 in IRS Debt in Less Than 5 Years
