If you know you owe taxes to the IRS, one of the most dreaded moments is when the last few details go into the tax software and the final number is presented to you. It is even worse when you expect to owe nothing or very little and find out otherwise. Because you didn’t expect to owe or you didn’t expect to owe so much, you may be wondering how you are going to pay the tax.
Fortunately, this is not a boat that you are in alone. There are many individuals unable to pay their income tax by the deadline. Perhaps the amount was more than expected or hard times have come about and now the amount just can’t be paid in one lump sum. The good news is that the IRS does have options available. Rather than doing something such as putting your income tax debt on a credit card or filing bankruptcy (must meet strict requirements to file on income tax), you can get the IRS to work with you.
The installment agreement is the most common “go to” for those taxpayers that owe income tax. You pay back all of your tax with a penalty and interest added, but you do so under a three year payment plan that works for you.
As for the requirements, you must owe $10,000 or less, you’ve filed returns on time and paid your income tax in the previous five years, you have not entered into a prior installment agreement in the preceding five years, the IRS sees that you cannot pay your income tax in full by April 15th or the extended filing date of October 15th, and you agree to pay the amount in full within the three year payment period.
If your tax debt is over $10,000, you’ve entered into a previous installment agreement, or you have even defaulted on an installment agreement in the past, the IRS may still be willing to work with you on a payment plan if you can convince them that you will not default on the plan. While the IRS seems like a bunch of mean people in business suits, that is not the case. There is an understanding that hard times befall people. Plus, the IRS is more concerned with getting their money in ways that don’t include taking someone to court for it.
Offer in Compromise
If the installment agreement is not affordable for you, you can make an “Offer in Compromise.” This repayment method involves you making an offer to the IRS that states you will pay a lump sum to settle the tax that you owe. The IRS will only accept an offer if one of three situations exists. The first situation is that there is doubt that surrounds the amount of tax that you owe. The second is when there is an inability to pay the full amount. The third is when paying the entire amount would cause financial hardship.
There are also four requirements that must be met. They are: All tax returns have been filed before applying for an Offer in Compromise, you are not in the process of bankruptcy (if you are, a compromise would have to be negotiated with the bankruptcy), you submit your offer with the $150 application fee and a payment that is in the amount of your proposed payment (if you do not propose a lump sum) or 20% of the proposal, and you submit the required financial information.
Many states enable taxpayers to opt into installment agreements as long as specific requirements are met. Each state is going to have a different set of requirements, but most have guidelines that are similar to those of the IRS. The similarities include: The tax debt cannot exceed a certain amount, there must be a hardship of some kind, and the agreement can’t be used to pay off a prior tax debt.
You will need to visit your state’s Department of Taxation website to see how an installment agreement can be requested. Some states require a telephone call and others require a specific form to be filled out. If a form must be filled out, it can usually be retrieved online and printed out.
When the financial situation is a difficult one, filing bankruptcy may be the only way to relieve oneself of debt. While bankruptcy typically does not include tax debt, there are some exceptions. For instance, the tax return needs to have been filed at least two years before filing bankruptcy. The taxes must also be assessed at least 240 days before the bankruptcy filing. This limit may be extended if there was a previous bankruptcy filing or if there was an Offer in Compromise. You must also prove that there is no willful evasion of taxes by filing bankruptcy.
Tax debts that cannot be discharged include tax liens, property tax incurred before the bankruptcy filing, “trust fund” taxes, employment taxes (excise and custom duties), non-punitive tax penalties, and credits or refunds that are related to non-dischargeable tax.
Of course you can see about borrowing money from friends and family, but this may not be something you want to do, as failing to pay them back can cause problems. If you are confident you can return the money in a timely manner, then that may be a viable option. You can also make the payment with a credit card, but will want to pay off the balance as soon as possible since the interest can far exceed the interest charged by the IRS. If you don’t believe you can pay the amount off quickly, then it may be best to enter into an agreement with the IRS.
Overall, you have a variety of options that you can take advantage of. The IRS does tell individuals to go ahead and file and to not panic. If you feel that you can pay the lump sum amount in six months, you can simply file an “extension to file,” which means you will need to file your tax return by October 15th and pay the amount then with penalties. For some individuals, this is all they need to do to ensure they can pay their tax bill. If you still can’t pay it, then you can try one of the options discussed above so that you do not find yourself owing back taxes.