Yes, it’s very stressful to owe back taxes. Such a delinquency can indeed cause sleepless nights. While it may be small consolation, you’re not alone. In fact, U.S. residents fail to pay more than $458 billion in taxes annually.
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Still, it’s past time for you to deal with your situation. If you don’t, rest assured, Uncle Sam will eventually deal with you. It is better to be proactive, and there are options available to you. Here’s how to deal with tax debt.
Don’t Delay
Be certain that you file your taxes, even if you cannot pay. As we say, your situation will worsen if the IRS doesn’t hear from you. In fact, it can become criminal. So, go to the agency before it comes for you.
Understand, though, that not filing by deadline could mean a monthly penalty of between 5% and 25% of unpaid taxes. You can always file an extension if more time is needed, but to skirt penalties and interest, send in as much of your estimated tax as possible.
Get Assistance
You should get tax advice from a financial planner or certified public accountant to make sure that you’re dealing with your tax circumstances optimally. It can help to have someone with expertise look objectively at your bigger financial picture.
Payment Options
If you need help paying your back taxes, which are taxes that are delinquent or overdue, the Internal Revenue Service has programs that can help you.
Request a Payment Plan
If you owe less than $50,000 in back taxes, installment payments can give you more time to pay up. The program works best for those who need more than four months to erase their balance. However, you still must pay interest and fees, which do continue to accrue until your balance is zero. Do be wary of a tax debt relief phone call, however, since the IRS will never call you about a payment plan unless you’ve communicated with the agency via mail first. Such a phone call could very well be a scam.
Having said that, this program allows you to make just one payment monthly on the entire amount owed. Depending on your balance, you should know that clearing your debt can take up to six years. Further, you’re still responsible for filing new taxes annually. Not paying any new liabilities could invalidate any payment plan.
Note, too, that if your tax bill is more than $25,000, payments must be paid automatically from a bank account. If the total owing is less than that, you may use a debit or credit card for payments. The government will charge you as much as $4 for every debit card payment, however, and about 2% of the payment if you use a credit card.
If you’re seeking low-income status, you must have a gross income that’s at or under 250% of the federal poverty level.
Seek an “Offer in Compromise”
This is an IRS program that’s ideal for those who don’t have the wherewithal to erase their tax debt, or those who would experience a financial hardship if they did pay up. It allows you to pay less than what you owe. To determine your eligibility, the IRS will consider your income, expenses, ability to pay, and assets.
Unless you are low income, an Offer in Compromise application will cost you $205, and you must be current on all tax returns. An application does suspend all collection activities.
The program also requires you to be current on all your tax returns, and you’ll need to make an initial payment. Any tax liens will remain in effect until your offer is accepted and you’ve fulfilled the terms of your agreement. Note that you may not be going through bankruptcy.
The chief rub here, however, is that the IRS accepts fewer than half the requests for such a plan.
Request “Currently-Not-Collectible” Status
If you can’t pay your taxes AND your living expenses, you can ask the IRS to put your account in what’s called “currently-not-collectible” status, which staves off attempts to collect. You likely must first prove your financial status via income and expenses documents, and the federal agency can still place liens on your assets.
So, yes, when it comes to how to deal with tax debt, you do have options. Your main takeaway here, though, should be that you must act right away so that your problems don’t worsen.
