In this economy, tight budgets may make it challenging to pay income taxes. This is true especially if you owe thousands of dollars.
But what do you do if you can’t pay those taxes? Don’t go into a panic; you do have some options.
File Regardless of Taxes Owed
It can be alarming to realize there isn’t enough money to pay income taxes. The first thought most people have is to avoid filing. It seems like hiding from the Internal Revenue Service (IRS) is better than dealing with them.But you must file anyway—because not filing an income tax return can incur penalties in addition to taxes.
The IRS calculates the failure to file penalty based on your unpaid taxes and how late you file. And the failure to file adds up with time. According to the
IRS, the failure to file penalty is 5 percent of unpaid taxes every month or partial month you fail to file. But there is a limit on the penalty. It doesn’t exceed 25 percent of your unpaid taxes.
Besides the monetary penalty, it doesn’t sit well with the IRS for you to ignore them. It will cause more problems down the road.
Communicate With the IRS
Contact the IRS immediately if you find yourself unable to pay your taxes. You can go to
IRS.gov or call to explain your situation. The IRS customer service toll-free 1040 line is 800-829-1040. But be prepared for a very long wait.
If you don’t communicate, it won’t bode well for you when you try to reach a compromise with the IRS. Communication is especially key if you want to set up a payment plan.
Set Up a Monthly Installment Agreement
Once you have filed your tax return, go on the IRS.gov website and fill out a monthly installment agreement application. If you aren’t computer savvy, you could mail in
Form 9465 with your Form 1040. Form 9465 is a request for monthly installments.
There is, however, a problem paying an installment plan. First, interest accrues on the unpaid balance and compounds daily from the date of the return until you pay the full balance. You also will be charged late-payment penalties.
The second problem is current taxes. While you’re paying your back taxes, you still must pay the current and future taxes. You don’t want to fall further behind.
Four IRS Installment Plans Available
The first is the guaranteed installment agreement. This is for taxpayers who owe less than $100,000. It allow you 36 months to pay the taxes.The second is the streamlined installment agreement. It is for taxpayers who owe $100,000 or less and must be paid in full up to 84 months. If you owe more than $50,000, you will need to call the IRS. Otherwise, you can apply online or mail Form 9465.
Those who owe more than $100,000 will need to pay down the balance or verify financial information. To qualify, they must provide detailed financial statements. This is to verify that they can make payments.
The third is the partial payment installment agreement. This is for those who can’t make the minimum monthly payment. This is where monthly payments are made based on what the taxpayer can afford. Financial records must be submitted to apply.
These plans come with interest on the amount owed and late payment penalties.
And, finally, is the non-streamlined installment agreement. This is an option if a taxpayer owes $50,000 or more and can make monthly payments to the IRS.
The IRS, however, will not automatically approve this agreement; instead, the taxpayer must negotiate with the IRS. The taxpayer must file Form 433-F, Collection Information Statement. This form collects information about income, debts, living expenses, assets, accounts, and allows the taxpayer to propose an installment payment amount.
Set Up a Short-Term Payment Extension
If you’re temporarily experiencing a cash-flow problem, a short-term payment extension might be the way to go.You can request a 120-day payment agreement. This will give you a few months to catch up. But just like the monthly installment, you will still accrue interest and penalty charges, but there is no fee to set it up.
This can be applied online at IRS.gov as long as you less than $100,000. If you owe more than this, you’ll have to call an IRS agent and set up the plan.
Negotiate a Settlement
If you can’t pay the taxes in total, you could request an
offer in comprise. This is where a dollar amount lower than the taxes owed is offered to the IRS.
According to the IRS, it’s a legitimate option if you can’t pay the full tax liability. The IRS takes into account:
- Ability to pay
- Income
- Expenses
- Asset equity
The IRS will approve an offer if the amount is all they can expect to collect.
Should You Hire a Tax Professional?
If you have simple taxes, owe less than $50,000, and don’t own a business, you could probably negotiate and set up your own payment plan. It may not make sense to pay a tax attorney.
But if you have more complicated taxes and owe more than $50,000, you might want to consider a tax attorney.
Be sure to carefully vet any professional help you find. Some businesses that claim they can help you with your taxes charge exorbitant amounts of money.
In most cases, you could negotiate or set up the payment without a company.
And, finally, if you decide to go with one of these companies, check reviews or ask for references. Some of these companies are not legitimate.
Don’t Panic If Taxes Are Owed
There are ways to handle taxes when you’re short on cash. The main thing is to file on time, regardless if you can pay your taxes. That will save you from being assessed penalties. Be open and communicate with the IRS—it will go a lot easier for you.The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
