Arrange to make payments on the debt. If you can afford to pay your debt in installation payments, file Form 9465 with your tax return. To have the payments withdrawn from your paycheck, file Form 2159. For direct debit payments, file Form 433-D. The fee for arranged payments is $105; for direct debit payments, the fee is reduced to $52.
File for an Offer In Compromise. The IRS will consider accepting less than the debt amount if a) they don't believe they can collect the full amount within the 10-year statute of limitations; b) there is some doubt as to whether the debt owed is correct; or c) the taxpayer can show that significant economic hardship would result without the compromise. The IRS will accept an OIC if the amount offered is greater than or equal to what the IRS determines to be the reasonable collection potential. If an OIC is accepted, the taxpayer can file Form 656 along with a $150 application fee.
Request Currently Not Collectible status from the IRS. If the tax debt would create economic hardship, a taxpayer can submit Form 433-A along with supporting documentation. The IRS will review an applicant's monthly gross income against her monthly allowable expenses. If granted, the IRS will re-review the taxpayer's status every 18 to 24 months.
File for bankruptcy. This is an extreme measure, but if you are having difficulty paying all of your bills--including taxes--it can provide immediate relief. You may be permitted to eliminate all of your tax debt by filing Chapter 7, or can create a payment plan through Chapter 13. File a petition in bankruptcy court, at which time your income tax debt is frozen.
Your income tax debt may be eliminated in Chapter 7 if a) the tax return was filed at least two years before the bankruptcy; b) the IRS tax assessment occurred at least 240 days before filing; c) the tax debt in question is from a tax return that is at least three years old; d) there is no fraud.
In Chapter 13, a bankruptcy judge may order a reduced amount of the income tax debt to be paid in a payment plan to a court-appointed trustee. Debt repayment plans are for a minimum of three years and a maximum of five years.
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