How to Repay Tax Debt

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If you're languishing beneath the burden of tax debt, you can take steps to repay the Internal Revenue Service. In fact, you must: Failure to do so may lead to wage garnishing, high interest rates on unpaid debt and penalty fees for lack of payment. Don't buy into the late-night television promotions for tax relief services. If they sound too good to be true, they probably are. Instead, work directly with the IRS to repay any tax debt.

Apply for an installment plan using IRS Form 9465 (see Resources). If you owe less than $10,000, have paid your taxes on time for the last five years and plan to pay back the entirety of the debt in three years or less, then the IRS is required to accept this installment plan. Expect to pay an application fee of approximately $50 to $100 for this service.

Consider other options if you don't qualify for an installment plan, or if you simply can't afford to make the necessary payments. Can you repay your tax debt with a credit card or by taking out a home equity loan? You may find that borrowing money from family and friends to repay tax debt, while difficult, offers better repayment terms—and maybe better customer service—than negotiating a payment plan with the IRS.

Fill out IRS Form 433-F, which helps the service evaluate exactly how much you can afford to pay on taxes owed (see Resources). Be warned that the IRS will consider every way of squeezing a bigger tax payment, including measures like selling your house and other assets.

Make an Offer in Compromise with IRS Form 656 (see Resources). This is a way of asking the IRS to compromise and accept less on the debt than you actually owe, but requires a down payment of 20 percent of the total you propose to pay, along with a $150 application fee.

Continue making monthly payments on any compromise offer that is accepted. You'll also have to file taxes on time and pay them in full for the next five years, and surrender any refunds, payments and credits to the IRS. Fail to do follow of of these steps will result in the IRS canceling the Offer in Compromise and pursuingyou for the full debt value.

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