Come tax season, many individuals and businesses find that they are unable to pay their full tax burden on time. Despite how common this predicament is, a sizable portion of taxpayers don’t know what options are available in these circumstances. In order to best resolve outstanding debts and keep from deepening your IRS troubles, it’s important to understand the many government and nongovernment options.
Researching the offerings, making a plan, and following through on how best to pay taxes owed will avoid long-term negative consequences and the anxiety that lingers with unpaid federal taxes.
First Step: File Your Return
First and foremost, it’s important to know that a delay in filing your tax return does not buy you time with the IRS. The taxes are owed regardless of filing status, and interest accrues daily on unpaid assessments. Furthermore, the IRS can levy additional fines for filing late, which only compound the severity of the situation. Put simply, there is no reason not to file your taxes on time, even if you can’t pay a dime of the amount owed at the time of filing. If necessary, request an extension of the filing deadline. A six-month extension is easy to obtain, but you must request it before April 15.
If you do not file your taxes and you owe the IRS, they are permitted to undertake several actions, including filing a federal tax lien on your property, which affects your credit rating and cannot be released until all taxes and related fees, penalties, and interest are paid in full. They may also seize wages, bank accounts, benefits, retirement income, trust funds, accounts receivable from debtor clients, future tax refunds, and property, inclusive of real estate and vehicles, in order to make the account whole. The IRS does not hesitate to take aggressive action to recover unpaid taxes.
If you are well under your limit on your credit card, you might consider paying off your tax bill that way, because it’s likely that the interest you’ll pay on your card is less than the IRS fees and penalties that you’ll face otherwise. In fact, the IRS specifically suggests this.
You could also use a home equity line of credit to pay off taxes. Because this is secured, your interest rate will be lower than either a credit card or an IRS installment plan — but remember that your home becomes the collateral in this scenario.
You could also borrow the money from a trusted friend or family member, if you are fortunate enough to be able to do so. If you know someone living off interest income, they could offer you a loan with a higher interest rate than they’re currently receiving from their financial institution, making it a win for both of you.
None of these situations is ideal to be in. However, going one of these routes will keep you from running afoul with the federal government. Most folks would rather owe money to a credit card company, bank, or family member than to the IRS.
Working With the IRS
If you cannot pay your full tax burden immediately after filing, don’t stress! This issue is common, so the federal government has developed several options. It may be worth your while to speak with a tax professional about which of the following options is in your best interest.
The IRS allows up to 120 days to pay the taxes due in full. You do not need to fill out an application, and there is no fee or formal arrangement for this 120-day window. The downside, however, is penalties and interest will compound until the full payment is received.
The IRS also offers monthly installment plans for those who owe less than $50,000 in taxes, fees, and penalties. Take stock of your total assets, total debts, and monthly income to sketch a general portrait of your financial health and determine how much you could pay each month toward your tax burden.
Four different installment agreements are available through the federal government, though each has its own user fees associated. Direct debit installment plans typically offer lower fees than others and guard against defaulting by automatically making the payments for you. More information on these agreements can be found here.
Electronic payments can be made via the IRS website’s Direct Pay system, which allows you to transfer money from checking and savings accounts at no additional cost. You may also use Direct Pay to pay on prior years’ taxes and view current and past payments. The IRS also offers its IRS2Go mobile application, where users can make payments, check the status of those payments or refunds, and find free tax preparation assistance and helpful tips. These features may be more convenient to you than by paying through a check or money order in the mail.
Please note that operating businesses that owe employment-related taxes will need to communicate directly with the IRS to find a satisfactory payment arrangement.
For those who feel they cannot make any payment right now and still afford reasonable living expenses, the IRS offers a status called “Currently Not Collectible,” wherein they will not seek any payments for the time being. You will have to complete a statement and provide proof of your financial status, including monthly income and expenses. The debt is not forgiven, however, and interest will continue to grow on the debt.
If you feel you will not be able to pay the full debt, or that doing so would create a financial hardship, you can request an “Offer in Compromise,” or OIC. You and the IRS work together to find a lump sum or periodic payment offer, though the process is very lengthy and can last years. The pre-qualifying questionnaire will help determine whether you could take advantage of the OIC. This option does not apply to individuals or businesses currently in a bankruptcy proceeding.
If you have complicated or dire tax issues, including very high balances or long periods of delinquency, do panic. The IRS doesn’t exactly have a reputation for friendliness, but the simple fact is that they would rather collect the money they are owed than dole out unnecessary punishments. That’s why they’ve created many options for those facing tax troubles.