Tax Debt Elimination
What Is Tax Debt Elimination?
Tax Debt Elimination is proactive tax planning strategies aimed at wiping the tax liability clean.
Tax Debt Elimination - The Cleaning
A proactive tax planning strategy aimed at wiping the tax liability clean.
Examples of tax elimination strategies:
- Roth IRAs/Roth 401(k)s - Contributions are made with after-tax dollars, and qualified withdrawals are tax-free.
- Municipal Bonds - Interest Income is exempt from federal (and often state) income tax.
- Tax-Free Savings Accounts (TFSAs) - In some jurisdictions, certain accounts grow tax-free.
- No tax on tips - Help to make ends meet for some people.
The key benefit is no future tax on eligible withdrawals or Income, which can be valuable in high-tax brackets or for long-term planning.
Understanding the IRS Installment Options
A hugh part of the Fresh Start Program, OIC and Installment agreements are options that can help you progress toward implementing tax elimination strategies. They serve as a practical step while putting tax reduction and elimination plans into action. Various options are listed below.
01
Guaranteed Installment Agreement
A guaranteed installment agreement may be available if you owe $10,000 or less, not including penalties or interest.
It requires you to pay your tax balance within three years and doesn't ask for a financial statement. To qualify, you must have paid all your taxes and not entered into an installment agreement within the past five years.
02
Simple Install Agreement
Formerly called a streamlined installment agreement, the simple installment agreement gives you up to 120 months or until the IRS collection statute expiration date (CSED) to pay your debt, whichever is sooner.
To qualify, you must owe $50,000 or less in assessed taxes, penalties and interest. This option is similar to a long-term payment plan but typically requires less extensive financial documentation.
03
Short-term payment plan
A short-term payment plan gives you up to 180 days to pay off your balance. It's available if you owe less than $100,000 in taxes, penalties and interest combined.
There are no setup fees, but penalties and interest will accrue until you've paid off your balance. You can pay from a checking or savings account online or by phone, or via check, money order, debit card, or credit card. Using a card to make payments may incur additional fees.
A short-term payment plan doesn't require fixed monthly payments; you're simply required to pay off your bill before the 180 days are up.
04
Partial Payment Installment Agreement
If you're facing financial hardship, you might qualify for a partial payment installment agreement. This installment plan lets you pay off what you can within the remaining time the IRS has to collect your taxes.
The IRS CSED usually spans 10 years, except in special circumstances. On a partial payment plan, you'll make a monthly payment you can afford until you've paid off your balance or the statute expires.
You'll need to provide financial disclosures when you apply so the IRS can determine if you qualify.
05
Long-term installment agreement
A long-term installment agreement allows you to make monthly payments over time, typically up to 72 months. It’s generally available to taxpayers who owe less than $50,000 in combined taxes, penalties and interest.
This plan involves setup fees, interest and penalties. Fees start at $22 if you apply online and pay through automatic direct debits, but it can increase to $107 if you apply over the phone, by mail or in-person. Fees may be higher if you choose a non-direct-debit payment method.
Low-income individuals may qualify for reduced or waived fees.
06
Other relief options
Installment agreements aren't the only form of tax relief the IRS offers. Some alternatives include:
Offer in Compromise: This lets you settle your tax debt for less than what you owe if you're experiencing financial hardship.
Currently Not Collectible status: The IRS may put your account in Currently Not Collectible status if your financial situation prevents you from making any payments on your tax debt. This status will pause collections efforts, but interest and penalties will keep adding up.
Penalty abatement: You may request a removal or reduction of penalties in certain situations, such as an illness or natural disaster. The IRS also offers first-time penalty abatement if you've had no tax issues for the past three years.
IRS Set-up Cost for Installment Agreement
IRS Costs of an installment agreement
Installment agreements will increase your tax liability due to interest, penalties and potential setup fees. Common costs include:
- Setup fees: Short-term installment agreements don't charge setup fees, but long-term plans do. They range from $22 to $178, depending on how you set up the plan and your payment method. Low-income taxpayers may qualify for reduced fees or waivers.
- Direct debit vs. non-direct debit: The IRS reduces your fee if you pay via automatic direct debits. On a long-term plan, for instance, the setup fee is just $22 if you apply online and use direct debit, but it increases to $69 if you apply online but use a different payment method.
- Interest and penalty accrual: The IRS charges interest and failure-to-pay penalties throughout an installment agreement.
Potential lien filings: The IRS may file a lien if you owe a large amount, which means it can seize your property if you don't pay. This could incur an additional fee.
Pros and cons of an installment agreement
There are both pros and cons of an installment agreement that are worth considering before you apply.
Pros
- Gives you the flexibility to pay off your tax liability over time
- Helps you avoid immediate enforced collections, such as wage garnishment and levies
- Offers a structured payment schedule with payments that may be adjusted to fit your financial circumstances
- Can apply online and get an immediate approval decision, in some cases
Cons
- Interest and failure-to-pay penalties will accrue, increasing your total costs.
- Missing payments can lead to termination of your plan and resumed collections.
- Some plans have strict requirements and require detailed financial disclosures.
- The IRS may file a Notice of Federal Tax Lien in some cases.
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