Debtor’s prisons are no longer allowed, and the IRS won’t throw you in jail simply because you can’t afford to pay. But tax debt can still feel like a prison sentence. If you’re retired and living on a fixed income, owing money to the IRS can keep you up at night. If you’re living on a fixed income or trying to budget the money to retire sometime between now and never, paying down a massive tax debt can feel daunting. Here are some options to consider.
Hire an Accountant
Sometimes the best solutions are the simplest and most obvious. Don’t try to manage your tax issues alone. An accountant can help you explore your options, negotiate with the IRS on your behalf, and reassure you that other clients have made it out of much worse situations. Don’t live in shame. Reach out to an expert who specializes in helping people manage delinquent tax accounts.
Make a Manageable Budget and Repayment Plan
In order to start paying off your debt, you need to get clear about what you owe. Then sit down with a pen and paper and make a realistic repayment budget. Even a few hundred dollars a month can make a huge difference over time. Once you know how much you can afford to repay and over what time span, present the IRS with a repayment plan, or ask your accountant to do it on your behalf. As long as the plan is reasonable, the IRS will likely accept it.
Consider an Offer in Compromise
An offer in compromise is essentially a tax settlement. You agree to repay less than the full amount of your debt, and in return the IRS gets an immediate lump sum payment. The offer must be a reasonable portion of the amount you owe. For help working out an offer in compromise, consult your accountant or a tax attorney.
Explore Debt Repayment Options
Tax debt is stressful. Which means that, even when your tax debt carries a lower interest than other debts, it’s generally best to pay it off first. Consider charging your debt to a credit card, or taking out a loan to either repay the balance or get it down to a manageable number.
Scared of credit card debt and personal loans? If you’re over the age of 62 and own your home, you have another option. A reverse mortgage offers you tax-free cash that you can use to repay your debt. You don’t have to repay the mortgage unless you sell your home, making it a great option for quickly eliminating stressful debts.
Know Your Rights
The IRS can garnish your wages and seize your assets. But small assets are worth little to the IRS—and worth even less if your tax debt is relatively small. Even more reassuring, the IRS will not tap into anything you own without first giving you plenty of warning. You don’t have to worry about waking up to an empty bank account. You’ll receive ample notice, and have plenty of opportunities to appeal or work out alternative arrangements. The IRS does not want to bankrupt you, and if they can get you to repay without doing so, they will. So stay in touch with them, or hire a tax attorney who can stay in touch on your behalf.
If you still have debt in retirement, how will you pay it off?
Photo courtesy of: Romain DECKER