You Owe the IRS, Now What?
So, you filed your income tax return, and a balance is due to the IRS. . .now what?
Well, that depends!
Can you afford to pay the balance in full by the original filing deadline?
If the answer to this question is yes, that is great! Be sure to remit your payment utilizing a method that provides proof that you have done so. I recommend to my clients that they pay their balances due electronically either by utilizing the IRS’s EFTPS system or through IRS Direct Pay. Be sure to carefully type in all taxpayer information requested and indicate the correct tax year and type of tax that you are paying, to ensure that the payment is correctly applied to your account.
But what if you cannot afford to pay the balance in full by the original filing deadline?
If you cannot afford to pay the balance due, there are several options available to you. But keep in mind that the balance of any unpaid tax will be subject to interest and penalties once the filing deadline has passed.
Can you afford to pay the balance in full within 120 days?
If you are just a little short on cash now but will have the money to pay in full within a few months, you can apply for a short-term payment plan with the IRS. Payments can be made utilizing automatic bank drafts via IRS Direct Pay, using the IRS’s EFTPS system, or by paying via check, money order, or debit/credit card. This is a no-fuss, hassle-free option. You will not have to file any financial disclosure forms or even ask for the IRS’s permission. Once your payment plan is done, you hopefully go in peace and sin no more!
But what if you cannot afford to pay the balance in full within 120 days?
Well in this case, you need to start asking yourself some tough questions:
- Why are you in this situation?
- Are you not withholding enough taxes?
- Are you failing to make estimated tax payments?
- Are you in the midst of a financial struggle that feels inescapable?
A key first step before you evaluate any options for dealing with your tax debt is to determine how you can get yourself into tax compliance for the current tax year. In fact, you may want to check out an article here on my website called “Are You a Compliant Taxpayer?”.
Tax compliance requires that you pay-as-you-go throughout the year so that you can meet your tax payment obligations at the filing deadline. If you address the past due taxes before dealing with the current year’s compliance, what generally happens to taxpayers is that the balances keep piling up year after year, rather than the taxpayer finding a way out of the debt cycle.
So, let’s say that you have designed a plan to prevent this from happening next year, now what do you do about last year’s tax debt?
After you have made the necessary adjustments to get into compliance, you will likely find that you have less money available to spend each month, now that you are paying your taxes as you should. Maybe you have increased your withholding on your Form W-4 or you have decided to do auto-draft estimated tax payments with the IRS monthly or quarterly, to make sure that you do not fall behind.
If you feel that after you have increased the current year’s payments that you can make a plan to pay off your debt with a long-term payment plan, you can apply online for an installment agreement with the IRS. If you owe $50,000 or less, you are not required to submit any financial disclosure forms.
Keep in mind with a long-term installment plan that your penalties and interest will continue to grow on the unpaid tax. So, it generally does not benefit you to stretch out the repayment period any longer than necessary.
But what if you feel that paying anything more than the current year’s tax leaves you financially strapped and unable to pay your household expenses?
Although many people see the IRS as the enemy, some people would be surprised to know that the IRS has options available to people who are struggling to pay their tax debt. The options available to you depend on many factors. Some of these factors are: how much you owe, whether you are communicating with the IRS (or pretending the debt doesn’t exist), your “allowable expenses” and “actual expenses” incurred each month, assets that are available to satisfy your debt, and how much time remains on the collections statute of limitations.
If you feel that you cannot afford to pay your tax debt, the first decision that you should likely make is to contact an authorized representative (Attorney, CPA, or EA) who can assist you with analyzing your situation. Upon discussing your situation with an authorized representative, you generally will have four options.
- You may qualify for a long-term installment agreement, which will allow you to pay your debt over time. Your representative will review your situation to ensure that what you are required to pay is fair with regard to your personal circumstances.
- You may be eligible for “Currently Not Collectible” status. This means that you will not be required to pay anything on the balance for a while. If you qualify for this option, the IRS will review your situation again in a year or so to determine if you are still unable to pay.
- You may be eligible to settle your tax debt for less than you owe by filing an “Offer In Compromise”. Whether you are eligible for an OIC or not will depend on your “reasonable collection potential”. I recommend having a professional assist you with this calculation. The IRS does provide a tool on its website that taxpayers can use to see if they qualify for an OIC. However, generally the tool does not serve as a good barometer of whether you will qualify, as a generic tool cannot analyze your specific personal circumstances. And let’s face it, an OIC is not the IRS’s favorite option for resolving a taxpayer’s debt, so there is an incentive for them to design a tool that discourages people from applying for an OIC. The IRS would much rather you pay in full or pay small payments over 6 years while penalties and interest continue to build. The IRS will only accept an Offer In Compromise if it is in the government’s best interest to do so.
- You may even be a candidate for discharging your tax debt in bankruptcy. Discharging tax debt in bankruptcy requires very specific circumstances, so if you have a significant amount of other debt that you are unable to pay, in addition to your tax debt, it might be time to contact a Bankruptcy Attorney in addition to the authorized representative referenced above.
Though this article primarily addresses IRS debt, one last thing that I want to mention is that oftentimes when a taxpayer owes income tax to the IRS, he or she generally owes taxes to one or several states as well. Be sure to consider any state tax balances in the course of determining how to resolve your tax debt.
After reading this, if you would like to discuss a plan for addressing your tax debt, simply fill out the form for a free consultation, and my firm would be happy to help you develop a plan.
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