How to Reduce Tax Debt Owed to the IRS

how to reduce tax debt

When you owe money to the IRS they are going to come after it soon enough. Instead of waiting for the collection process to start, you are much better off getting ahead of the game and straightening everything out on your own.

The IRS offers various alternatives to reduce tax debt owed if the amount cannot be paid in full. The alternative that will be allowed by the IRS is determined mainly by the amount owed and financial situation of the taxpayer. The number one priority of a taxpayer that owes tax should be to get into some sort of agreement with the IRS because if no agreement is made, interest and penalties will continue to rise at a much quicker rate than if no agreement was made.

#1 Alternative: Tax Payment Plans

Before you can consider any other options, you must consider paying through an installment agreement. If you do qualify for an installment agreement and can afford the monthly payments, the IRS will not consider other alternatives.

  • Type 1: Guaranteed Installment Agreement - The simplest type of payment plan available. This type is for taxpayers hwo owe under $10,000 in taxes. This method is typically quickly and easily accepted by the IRS.
  • Type 2: Streamlined Installment Agreement - This is for taxpayers that owe $50,000 or less. This method does not require detailed financial statements like the financial verified installment agreement below.
  • Type 3: Financial Verified Installment Agreement - This is for taxpayers that owe over $25,000 in taxes and cannot make the minimum required monthly payment with the above mentioned types of installment agreements. This requires more detailed financial documents to be submitted for appproval.
  • Type 4: Partial Payment Installment Agreement - This method can be considered if none of the above installment agreements would financially work for the taxpayer. This allows taxpayers to have a lower monthly payment and possibly pay less than the total amount owed over the term of the payment plan.

All of the above plans will help you pay off and reduce taxes owed to the IRS while limiting tax penalties and interest from adding up. If none of the above plans work, then the IRS may consider the options below.

#2 Alternative: Settle for Less or Pause Collection Actions

If you cannot qualify for any forms of installment agreements the IRS may consider the following options to help ease the financial burden.

  • Type 1: Offer in Compromise - This method allows taxpayers to settle taxes for substantially less than the original amount owed. There are extemely rigid requirements that must be met to qualify and a good deal of paper work that must be completed. To see if you qualify, read our detailed guide on the IRS Offer in Compromise.
  • Type 2: Hardship - Many times if a taxpayer cannot make any payments towards the debt owed, the IRS may place them "Currently not Collectible" status. This will suspend collections and the IRS will not take any collection actions as long as the taxpayer is under this. Sometimes a taxpayer may stay under this so long that the statute of limitations of the tax debt expires and taxes are no longer owed.

Is all of this too confusing for you? Hiring a tax firm is a good decision if you are lost about how to settle your tax debt. A tax professional can help you determine which option you qualify for, how much to offer the IRS, and much more.

Tax Debt Help and Related Topics


Tax Problem How To Guides
Guides to resolve common tax problems pertaining to unpaid taxes,unfiled taxes, tax debt, tax liens, tax levies & more.

Guide on IRS Tax Settlement
Understand what a tax settlement is, how it works, how to go about settlement taxes and what the various options are to settle taxes.

DIY or Hire a Tax Resolution Company?
A guide that covers tax situations that can easily be done yourself vs tax situations where it may be a good idea to hire a tax resolution firm.

Installment Agreement Tax Guide
A guide that will help you select the best installment agreement for your unique financial sitatuion.