The saying goes that two things are certain—death and taxes.
But what if you can’t afford to pay your tax bill? This scenario is more common
than you might think, and you definitely have options. I was there myself
several years back. It took some time and some extra money, but I eventually
got back on track with the IRS.
Don’t try to hide from the IRS or your looming tax bill.
Send your return in on time as you normally would. If you don’t pay your tax
owed, the IRS will send you a letter asking for the tax due, plus interest. The
penalty is 5% of the tax not paid by the due date for each month that your
return is late, also counted toward partial months. The maximum penalty is
usually 35%, but if your return is more than 60 days late, the minimum penalty
is $100 or the balance of the tax due on your return, whichever is smaller.
Of course the best option to avoid penalties and interest is
to try and pay your tax bill. Maybe you can borrow the money from a relative or
friend. If you’re a homeowner you could borrow against the equity in your home
to cover your tax bill. In an interesting twist, the interest on the home
equity loan could be deductible on the following year’s return.
You
can request up to 120 days to pay in full. There’s no fee for this arrangement,
but interest will continue to accrue until the liability is paid in full.
I chose to contact the IRS directly. My friendly IRS
operator recommended an installment plan for me. Of course I still owed the
full amount of the tax, I just had to break it up over time. You’ll start with
either and Installment Agreement Request (Form 9465), or Payroll Deduction Agreement Form 2159. You can also
request a direct debit Installment Agreement, Form 433-D.
Form 9465 is the primary installment agreement form you’ll
be concerned with, and it’s easy to complete. You’ll provide your name,
address, Social Security number, the name of your bank and your employer.
You’ll put how much you owe and how much you want to pay each month.
The fee for installment agreements is $105.00, and the fee
for direct debit agreements, is $52.00.
If your installment agreement is approved, you’ll have a
number of options available to make your payments:
Direct Debit from your bank account
Payroll Deduction from your employer
Payment via check or money order
Payment by Electronic Federal Tax Payment System (EFTPS)
Payment by credit card via phone or Internet
Payment by Online Payment Agreement (OPA)
The
IRS suggests you pay as much as you can as part of your installment agreement.
You also need to let them know what day of the month you will be making the
payment each month, the 1st through the 28th.
The
IRS offers a number of incentives to encourage you to use direct debit or
payroll agreements, since they definitely get their money each month that way.
Advantages to going this route include the reduced user fee of $52, no monthly
check to mail, postage savings, no check processing charges, no problem
remembering to make the monthly payment and having to face subsequent
penalties.
Another option is referred to as an offer in compromise. You still pay the IRS, but the IRS agrees to let you pay less than the total amount due if they agree to the compromise. In the past, the IRS would consider an offer in compromise if your liability for the taxes owed was in question, or if they weren’t sure they could collect the taxes. Now, the IRS approves offers in compromise based simply on economic hardship.
To apply for an offer in compromise, you’ll have to complete the offer in compromise application, Form 656. The filing fee is $150. Keep in mind this program is intended for taxpayers with extreme circumstances. As part of the offer, you can offer to make a lump sum, cash payment or fixed payments over a period of time.
So, if you can’t pay your taxes, there are still options available. Just remember to know all of your options, do your research, be honest, and don’t hide from the IRS. They’ll track you down!
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