Tax Debt 101 5 Ways to Reduce Tax Debt FAQ Tips for Dealing with Tax Debt

Five Ways to Reduce Tax Debt

We hear it all the time: "I need to reduce my tax debt ASAP." Owing the IRS money is never a pleasant experience, and tax debt can take an especially heavy toll on your finances. Here are five ways you can effectively reduce your tax debt for lasting relief.

  1. Reduce my tax debt with installment payments. You can arrange installment payments with the IRS to pay back your tax debts gradually. Spreading the payments out over time will help you fit the expense into your budget. Of course, you will have to pay interest on the back taxes you owe, but this option is still preferable to having to cough up a lump sum.
  2. Reduce my tax debt with a partial payment agreement. This arrangement is similar to installment payments, but you do not repay the full amount of taxes you owe. Instead, you make monthly installment payments on a reduced dollar amount. The partial payment option is relatively new and may not be available to everyone.
  3. Have the debt declared uncollectible at the time. Your IRS agent will have to determine that the tax debt you owe is not collectible at the present time. This could buy you an additional year or so before you must begin paying on your debt.
  4. Reduce my tax debt with a reduced lump-sum payment. If you are willing to pay a lump-sum amount to the IRS, you may be able to negotiate for a reduced payoff amount. This is called an offer in compromise. Although you will usually have to pay all of the amount up front, you may also be able to arrange a very short-term installment payment plan.
  5. Reduce my tax debt by filing for bankruptcy. You might be able to reduce tax debt by discharging the debts under Chapter 7 or Chapter 13 bankruptcy. Keep in mind, however, that these petitions have very strict rules and will harm your credit for seven to ten years.

Should You Do It Yourself?

Another question our visitors commonly ask is: "Should I try to reduce my tax debt on my own?" This is a valid question, as the advice of a tax consultant never comes cheap. A good rule of thumb is to try to reduce tax debt on your own if you have $10,000 or less in tax debt. However, if you owe between $10,000 and $25,000 in taxes, you should hire a tax professional for assistance. For taxpayers who owe the IRS over $25,000, a good tax consultant is especially critical to review your past returns and arrange a payment plan.