Are you worried about the upcoming tax season and the bill that the Internal Revenue Service may be sending you?
Most of the time when we’re unexpectedly caught in a tight financial situation, panic can overcome us and visions of prison creep into our minds. If you think you might soon be in this situation, take a deep breath and relax. Approach the situation logically; you are not going to jail because you owe tax.
In an ideal world, taxpayers have planned appropriately with the help of their tax adviser and are prepared when their April 15 tax filing comes. However, not everything in life goes as smoothly as planned and sometimes April 15 arrives, and you aren’t ready. In this case, your tax liability may be an unwelcome surprise, and you may not have the cash on hand to pay the bill.
When you’re in a tight situation and facing an unpaid balance, you need to know the facts.
First, in order to avoid late filing penalties and keep any interest to a minimum, file your tax return on time. If you have an unpaid balance with the IRS, the good news is that there are many options available. Of course, you can always borrow from friends and family, pay with a credit card or obtain a line of credit to pay the IRS immediately, but there also are options available through the IRS.
Installment agreements are available to taxpayers who cannot immediately pay 100 percent of their debt, but who are able to pay their entire tax liability over time (less than five years, in most cases). These agreements are usually available for taxpayers with a debt of $25,000 or less and can be requested by filling out a form with the IRS.
In order for the IRS to accept an installment agreement, the taxpayer must be current on filings and generally owe for the most recent tax year only. If your liability is under $10,000, your request is approved automatically if you have a good filing and payment history and structure the plan to pay off the total liability within 36 months. If your liability is more than $25,000 in debt, you may still qualify for an installment plan, but requesting the plan is more complex. Installment agreements must be mailed in and scheduled payments must be made by the taxpayer with the IRS while awaiting an IRS response (usually 30 days).
In instances where the taxpayer owes for multiple years, a payment structure can still be achieved through direct contact with a local agent. Your tax professional can sit down and discuss the realities of your situation one on one with more efficient and immediate decisions. Regardless of how your installment plan is approved, it is important to remember that there is a small fee for setting up the agreement and interest will continue to compound daily until your liability is paid. The agreement will also not automatically remove tax liens, until your liability is paid.
As a last resort, if you find yourself unable to structure a payment plan that will pay off your liability within the time allowed, an Offer in Compromise may be a solution to resolving your tax debt. You have probably seen advertisements for this type of plan on television with claims of settling your debt for pennies on the dollar. While these advertisements have some basis for their claims, the process is not as easy or accessible as the ads may make it seem.
The IRS does have the authority to reduce your tax liability in order to settle a federal tax liability, but under extremely limited circumstances. Generally, offers are not accepted unless it appears that the taxpayer’s debt could never be paid in full. Keep in mind that the requirements of this agreement are much more stringent than an installment agreement, and the IRS has stated that less than 1 percent of all balances due are resolved through this program.
In addition to the low acceptance rate of this program, a 20 percent lump sum cash payment is required when submitting the offer.
Like many tax issues, the rules for various payment programs have become more complicated. If you’re concerned about your tax payment situation, it may be best addressed by consulting your tax professional who can help guide you through this process.
Deborah Helton CPA is a supervisor at BiggsKofford P.C. She can be reached at firstname.lastname@example.org or 579-9090.