You may owe more tax than you can afford to pay. Even though the US tax agency (IRS) is not charitable by nature (!), it understands some taxpayers may encounter difficulties in paying their taxes and offers programs to assist. Below are 5 options if you are struggling to pay your taxes.
How long can the IRS collect your unpaid taxes?
Once you file your tax return, the IRS has 10 years to collect on the tax reported on your tax return. If you do not file a tax return, the statutes of limitation do not start and the IRS can start a collection action indefinitely on your account. To know more about tax filing deadlines: https://kbfinancials.biz/tax-calendar/
What collection actions can the IRS take?
If you do not pay your taxes and you do not sign up for one of the 5 options below, the IRS will start collection on your account. As a general rule, the IRS wants to collect as much tax as it can AND as quickly as it can. To do so, the IRS will take aggressive actions including; contacting your home, your work, your social clubs, starting levies on your possessions, your car, your bank account, your wages and liquidating your investment and retirement accounts. To know more about the collection process: https://www.irs.gov/pub/irs-pdf/p594.pdf
Option #1: Make a partial payment
If you cannot pay your tax in full by the due date, consider making a partial payment. Doing so will prevent interest & penalties from accumulating. Interest and penalties build up quickly and overtime can exceed the original tax due. To make a tax payment electronically: https://kbfinancials.biz/managing-your-irs-account-online/
Option #2: Ask for a short-term payment plan
You can request to pay your taxes due within 6 months. With a short payment plan you do not need to provide any financial forms and there is no set-up fee. To know more: https://www.irs.gov/payments/online-payment-agreement-application
Option #3: Ask for a long-term payment plan (Installment agreement)
The IRS provide a number of plans that grant you additional time to pay your taxes including: a 3-year plan, if you owe $10,000 or less – a 6-year plan, if you owe $50,000 or less – or a a streamlined installment agreement if you owe $250,000 or less. With this agreement, you repay the debt within the terms laid out.
For some of these plans payment plans, you may need a clean history: ie you filed and paid your taxes on time in prior years. You will also need to provide complete and accurate financial information – if the IRS need to confirm that your can’t pay the full amount. Once you are in an installment agreement, you are required to maintain tax compliance – such as filing your tax return and paying your taxes on time for the future years. To apply for a payment plan – https://www.irs.gov/payments/online-payment-agreement-application
Option #4: Negotiate a lower balance to pay
If after considering all payment options, you still cannot pay the tax or that doing so will create a financial hardship, you may make an offer to pay less than the amount due (Offer in Compromise- OIC). The revised tax due will be based on what the IRS considers your true ability to pay. To be eligible for this option, you will need to be current with all filing requirements. To see if you qualify for an OIC: https://irs.treasury.gov/oic_pre_qualifier/
Once the OIC amount is paid, the rest of your tax debt is forgiven. However, you may have to agree with the IRS that in the event your financial condition improves, you will pay more than you offered in the following years. To apply for an OIC – https://www.irs.gov/payments/offer-in-compromise
Option #5: Obtain a delay in the collection of your debt
If after reviewing your financial situation, the IRS determines that your expenses outweigh your income and that you do not have assets that can pay your debt in full, the IRS may delay collecting the amount you owe (Currently Not Collectible status). This status is temporary and the IRS will follow up and contact you every 9 to 12 months for an update onyour financial situation. To apply for a CNC status – https://www.irs.gov/businesses/small-businesses-self-employed/temporarily-delay-the-collection-process
Reminder: 4 tips to minimize penalties for late payment
For most of the options listed above, you may be charged interest & penalties for paying your taxes after the due date. To minimize those penalties, below are 4 tips to assist you:
- File all your returns – even if you can’t pay, file your tax returns – the penalty for not filing is much higher than for not paying – and can reach tens of thousands of dollars on some international forms – To know more: https://kbfinancials.biz/7-things-to-know-if-you-file-your-us-tax-returns-late/
- Pay electronically – paper checks often get lost in the mail or are misapplied by the IRS. To pay electronically, use your IRS online account – to know more: Your IRS online account – KBAUER LAW PLLC (kbfinancials.biz)
- Respond to notices – The IRS will send you 4 notices at 5-week intervals regarding your unpaid tax. Respond to each letter, even if it is to say that you cannot pay the tax right now.
- Sign up for monthly reminders of tax deadlines: stay up to date with federal tax deadlines with just ONE monthly email in your inbox – KBAUER LAW PLLC : Sign Up to Stay in Touch (constantcontact.com)
Each taxpayer is unique and so is the tax strategy tailored to his/her specific situation. For assistance with your international tax needs, please contact Karine Bauer, EA, JD – HERE
Bear in mind the date of this article as tax laws change over time.
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Updated January 8th, 2024