Debt Reduction and Taxes

Important Points

First, it is necessary to understand that the IRS does not relieve you from any tax liability because you have credit card debt. It does not look at that debt as an inability to pay.

In addition, many credit card debt consolidation companies cannot assist with debt reduction and taxes, mainly because these particular companies are not staffed with certain tax professionals, such as a tax attorney, certified public accountant or enrolled agent. For the purpose of this article, each professional is defined as:

• Tax Attorney – a lawyer that specializes in tax law.

• CPA – an accountant certified and licensed in a particular state to prepare tax returns for individuals and corporations.

• Enrolled Agent – either a former IRS professional or a tax professional certified by the IRS.

Steps to Take for Debt Reduction and Taxes

According to the IRS, there are many ways to settle tax debt.

First Make an Attempt

• Consider liquidating certain assets, such as bank accounts, financial investment accounts, cars, boats, real estate, life insurance and retirement plans, before the IRS places a lien on these to absolve the debt.

• Secure a loan to pay off the debt. Once the IRS penalties and interest are added to tax repayment, a conventional loan may save you money in the long run and look better on your credit report.

IRS-Approved Payment Solutions

• Payment Extension. The IRS allows taxpayers to request a payment extension of up to 120 days. This is usually the advised course of action.

• Payment Installments. This is an opportunity to repay the tax debt in monthly installments. The IRS arranges for automatic withdrawal from a taxpayer’s bank account or payroll deduction.

• Delaying Collection. If a taxpayer is genuinely unable to pay due to extenuating circumstances, the IRS may decide to delay collection for a period of time.

• Offer in Compromise. Otherwise known as an OIC, this is a final option that requires an application and IRS approval to allow a taxpayer to resolve the debt for less than the amount owed, only after other payment options have failed for one reason or another. The IRS has sole discretion over the approval of these applications, and few are accepted.

Beware the Promise of Compromise

Many tax relief companies claim to offer assistance with debt reduction and taxes and often tout their ability to get debtors off the hook by negotiating the OIC on their behalf, handling all the forms and reducing the debt considerably or down to near nothing. There are, of course, certain costs involved with this process.

The IRS issued a consumer alert in 2005 warning taxpayers of this practice. All the necessary information as to what qualifies a taxpayer for an OIC option, the forms involved and further assistance can be found for free on the IRS Web site. The IRS always makes the final determination on who is accepted for this option, regardless of promised negotiation tactics, and whether the $150 OIC filing fee can be waived.

The agency also encourages individuals to seek the advice of a tax attorney, CPA or enrolled agent to explain the OIC filing process, as there are many reputable tax assistants that will do this for a nominal fee.

Future Goals for Better Financial Management

• Arrange for a consultation with a CPA. This individual will not only look at your overall tax picture past and present, but also advise you on many other financial matters that affect your future. CPAs are not generally expensive, but visiting one will indeed cost more than dropping by the quick flash tax preparation kiosk at the mall. They usually charge by the hour or by consultation, with $100 to $200 being the average, depending on locale. Visit the CPA Directory site to better understand the role of a CPA and to find one near you.

• Talk with your company’s HR staff. Sometimes, people encounter tax difficulties simply because they don’t understand tax withholding and how this may need to fluctuate from when the form was first filled out at hiring. Your company’s HR department should be able to explain in detail what you need to do to avoid tax penalties.

• Don’t pay taxes with your credit card or get a refund anticipation loan. Both of these practices just tie you to the railroad tracks, and the debt train will not stop.

• Always file your tax return, even if you can’t pay. File first, then find the options for paying. The penalty for not filing is much more costly than that of paying late. This keeps you on top of the situation, instead of waiting for threatening letters and phone calls.

You can take control of debt reduction and taxes. Seek the advice of qualified professionals and work through the process step by step.