How to Settle Your State Tax Debts

How to Settle Your State Tax Debts

• Jan 15, 2022

We talk a lot about working with the IRS to settle your federal tax debts. But the federal government is just one entity that collects taxes from you; you also pay taxes to your state. How do you settle your state tax debts? Are they settled when you take care of your federal debt? Or do you need to take care of it separately? Keep reading to learn more about your state taxes and how to receive debt relief for those tax debts.

Are They Settled Together?

Typically, all of our tax issues are handled at once. You file your state tax return when you file your federal return. You pay them both at the same time, too. So, are your state taxes also settled when you settle your federal tax debt? Despite the fact that we tend to lump state and federal together, these are entirely separate debts owed to separate entities. Your state and federal returns are separate, your debts are separate, and you must settle them separately as well.

This can come as a nasty shock to someone who’s put in a lot of effort to get on a federal repayment plan, only to discover they’re still delinquent with their state. It’s important that you work to settle both debts, whether by paying what you owe or being put on a debt relief or settlement program.

How Serious Is State Tax Debt?

People tend to assume that state tax debt is less serious than federal tax debt, but this isn’t the case. Your tax debt to the state should be taken just as seriously as any federal debts you may have, and you should be making genuine efforts to settle it. In fact, many are surprised to learn that state tax debts can follow you around for even longer than federal ones.

In general, the IRS has a 10-year statute of limitations for collecting taxes. But each state is responsible for setting their own statute of limitations for tax collection, and that range goes from three years all the way up to 20 years. Additionally, some states allow agencies to renew tax liens for an additional 20 years beyond the tax debt’s expiration date. State tax debt does not go away easily, but it can be settled if you’re willing to cooperate with your state’s agency.

What Are the Options for State Tax Debt Relief?

Before we get into the settlement options for state tax debt relief, it’s important to be aware that the specific requirements for all of these relief programs can vary from state to state. While most states follow the IRS’s requirements for these relief programs (which also mirror the federal relief programs), some do have different qualifications. We encourage you to research your state’s requirements for relief programs, or schedule a consultation with one of our advocates to receive assistance with determining whether or not you qualify.

With that being said, these are the debt relief options available in almost every state in the country:

• Installment payment agreements – Also known as long-term payment plans, these allow you to make payments on your tax debt each month. This is typically done over a six-year period.
• Offer in compromise (OIC) – These are difficult to qualify for, but if you meet the requirements, you could pay off your tax debt for less than what you owe. To put it simply, you would make an offer to your state’s tax authority for the amount you believe you can reasonably pay, and they will determine whether or not to accept it. If they accept your offer, you’ll pay one lump sum to erase your tax debt.
• Currently not collectible (CNC) – This doesn’t settle your tax debt as much as it relieves you from collection efforts. CNC places a temporary hold on all collection efforts and penalties on your tax debt based on your inability to pay.
• Innocent spouse relief – This program frees an individual from their spouse’s or ex-spouse’s tax debts.

If you would like to be placed on a settlement program, you’ll need to work with your state’s tax authority. It’s important to note that, in addition to having different qualifications for some settlement programs, states can have more than one taxing authority as well. Navigating state tax debt repayment can be even more complicated than settling your federal tax debts, and we strongly encourage you to work with one of our professionals to get your debts settled quickly.

Start working towards relief from your state tax debt today by scheduling a consultation with the IRS Advocates.