Americans can’t help but think of Tax Day once the month of April arrives. While business taxpayers have been diligently paying Uncle Sam quarterly throughout the year, personal taxes come due but once per year – on the dreaded April 15th. This year, as Tax Day looms, many wonder what they will do if they ultimately cannot pay the tax bill owed. Whether working as an independent contractor or being penalized for early retirement distributions, there are a number of reasons why that “tax amount owed” was not preemptively withheld. Fortunately, there are options for taxpayers with looming tax bills, and frequent and regular communication with the Internal Revenue Service (IRS) is always a good place to start.
Full & installment agreements
For some taxpayers, the full amount due can be paid relatively quickly over a series of large payments. For those in this category, a full payment agreement may be a good choice. If a taxpayer believes full payment can be tendered within 120 days of the due date, the IRS may allow for an extension of time to pay without an additional fee. Interest, however, will continue to accrue.
For those with a larger balance to tackle, an installment agreement may be the better bet. If a taxpayer cannot make the payment immediately or within 120 days, the IRS may accept a payment plan if the following eligibility factors are met:
- Owe less than $50,000 in combined tax balances, penalties and interest;
- Are not engaged in an open bankruptcy proceeding;
- Are willing to set up automatic deduction of monthly payments.
In addition to eligibility requirements, taxpayers may be required to pay a set-up fee for long-term payment plans (longer than 120 days). However, low-income taxpayers who can demonstrate financial hardship may be eligible for a waiver of the set-up fees. Also, the amount of the set-up fee varies depending upon whether the taxpayer applies over the phone, through the mail, or online (the cheapest option).
Options for larger balances
Payment plans are not a possibility for taxpayers with larger balances, but there may still be options to consider. An “offer in compromise” is an option by which a business or personal taxpayer agrees to a certain amount to be repaid, with some of all of that amount due immediately, while the remaining portion may be paid down through one of the plans mentioned above. To be eligible, a taxpayer must have all required returns submitted and not be actively engaged in bankruptcy proceedings.
Always keep in mind that the IRS will assess monthly penalties and interest for unpaid balances, so it makes fiscal sense to tackle tax debt as soon as practicable. Of course, if a tax debt can be paid in full (albeit late) that is ultimately the best way to avoid racking up a bunch of fees. Even if you cannot pay the expected balance in full or in part, always be sure to timely file the tax return anyway. The IRS will assess a separate penalty for failure-to-file, which can be easily avoided by getting the return in on time.
When to seek legal help
If the options discussed are not available, or the IRS is starting to turn up the heat on the overdue balance, it may be time to shift gears toward avoiding a collection, lien or levy. The IRS can garnish wages, take valuable assets or even initiate criminal proceedings if it believes a taxpayer has intentionally evaded payment of taxes or committed some type of fraud. If this scenario is beginning to unfold, it is important to speak with a tax attorney to discuss options to avoid loss of liberty or property – both of which the IRS can accomplish given certain circumstances. In almost all circumstances, communication with the IRS is the key to accomplishing an agreeable resolution, so do not be fearful to give them a call and work out a solution.