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Using Debt Restructuring To Resolve IRS Tax Debts

By Spodek Law Group | February 20, 2024

Using Debt Restructuring To Resolve IRS Tax Debts

Dealing with tax debt can be really stressful and overwhelming. I totally get it – the letters from the IRS can seem scary and confusing when you don’t know how to handle it. Just know there are options out there to help resolve IRS tax debts. I wanted to give a quick rundown on how debt restructuring works and how it can be used to tackle back taxes owed to the IRS.

What is Debt Restructuring?

Debt restructuring basically means changing the terms of your current debt to make it more manageable for you. When it comes to IRS tax debt, this usually involves setting up an alternative payment plan that reduces your monthly payments to an affordable amount based on your financial situation.

The IRS offers programs like:

  • Installment Agreements – Pay back taxes owed over 6 years
  • Currently Not Collectible status – Pause payments if facing financial hardship
  • Offer in Compromise – Settle tax debt for less than what you owe

Debt restructuring gives you a chance to become compliant with taxes owed and avoid aggressive collection actions like wage garnishments or property liens. It can provide much-needed relief if you’re struggling with back taxes.

How to Qualify for IRS Debt Restructuring

To qualify for IRS debt restructuring programs, you’ll need to prove two things:

1. Financial Hardship – Basically showing the IRS your expenses exceed your income each month. This hardship makes it impossible for you to pay in full.

2. Tax Compliance – Being in compliance means you have filed all required returns and are making estimated tax payments for current years. This shows good faith.

As long as you meet these two requirements, you’ll likely qualify for some form of payment relief. The specific debt restructuring program will depend on your personal financial situation and amount owed.

Using Installment Agreements to Restructure Tax Debt

One of the most common ways to restructure IRS tax debt is through an installment agreement. This allows you to pay off your balance due over 6 years in affordable monthly payments. It’s essentially a payment plan with the IRS.

Some benefits of installment agreements include:

  • Lowers monthly payments
  • Stops IRS collection actions like wage garnishments
  • Avoids tax liens being filed

The IRS looks at two things when approving installment agreements:

  • Your income – Using allowable expenses, the IRS calculates how much you can afford to pay each month.
  • Amount owed – For balances below $50k, the IRS usually approves online payment plans easily. Over $50k may require more financial disclosure.

You can even apply for installment agreements online through the IRS Online Payment Agreement tool. It provides instant approval results for up to 72 months of payments.

Getting into Currently Not Collectible Status

If you can’t afford monthly installment agreement payments, requesting ‘Currently Not Collectible’ status may help restructure IRS debt.

This program puts a temporary hold on IRS collection efforts while experiencing financial challenges. To qualify, you must prove to the IRS that:

  • Your income only covers necessary living expenses
  • There are no assets the IRS can seize to pay toward the taxes owed

This usually requires submitting detailed financial information documenting your income, expenses, assets and liabilities.

If approved, the IRS pauses all collection action against you. This provides financial breathing room to allow you to get back on your feet. Interest and penalties continue to accrue during this time however. After 12-24 months, the IRS re-evaluates your ability to make payments.

Using Offer in Compromise to Settle IRS Debt

For some taxpayers, an Offer in Compromise provides the best form of debt restructuring to resolve IRS tax debts. This program allows you to settle tax debts for less than the full amount owed. The IRS approves these when:

  • You have no ability to ever fully repay the tax owed
  • There is doubt the IRS could ever collect the full amount due

It provides a fresh start financially by forgiving a portion of tax debt legally.

The IRS looks closely at your income, expenses, assets and future earning potential when reviewing Offers. You must prove paying the IRS in full would create an economic hardship. Offers usually provide the lowest payment options based on what the IRS determines you can afford.

Getting Help from a Tax Professional

Trying to navigate IRS debt relief options on your own can be confusing and frustrating. That’s why working with a tax professional makes sense.

An Enrolled Agent or CPA who specializes in tax debt resolution can help you:

  • Determine the optimal debt restructuring strategies for your situation
  • Compile financial information needed to submit an agreement
  • Negotiate with the IRS on your behalf
  • Avoid future tax debts through improved compliance

This expertise and experience can make a huge difference in successfully restructuring IRS tax debt. The process becomes much simpler with a professional guiding you.

Take Control of Your Tax Debt Today

If mounting IRS tax debt has you worried and anxious about the future, know there are always options available to regain control of your situation. Debt restructuring through payment agreements or settled offers provide the relief needed to resolve tax debts and move forward financially. Don’t wait – get a professional involved now to discuss the tax resolution strategy right for your personal circumstances. It is possible to resolve tax debt even in the most difficult situations. The sooner you take action, the easier the process will be.

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