It is generally inadvisable to fall behind on income tax payments. Doing so can result in the accumulation of debt owed to the government, which will eventually be subject to interest. Additionally, delaying payment may lead to more severe consequences.
However, the Internal Revenue Service (IRS) may be willing to negotiate with individuals who can demonstrate that their inability to pay taxes was due to financial constraints rather than an intent to defraud the government. For those in this situation, it is crucial to explore options to avoid potential legal repercussions for tax debt.
The IRS provides options for individuals who are unable to immediately pay their tax debt. It is essential to thoroughly understand these options and select a strategy that aligns with one’s financial circumstances.
The Internal Revenue Service (IRS) Installment Agreement is a payment option for individuals or businesses who owe taxes but cannot pay the full amount owed in a lump sum. It allows taxpayers to make smaller, more manageable payments over time.
To apply for an IRS Installment Agreement, taxpayers must fill out and submit Form 9465, which is a Request for Installment Agreement. There is a one-time user fee associated with this application, but the fee can be reduced or waived for certain qualifying taxpayers. The IRS will generally respond to the request within 30 days.
When setting up an Installment Agreement, taxpayers can choose from several payment options:
- Direct Debit: Payments are automatically deducted from the taxpayer’s bank account on a specific date each month. This option is often preferred because it reduces the risk of missed payments and eliminates the need to remember to make payments.
- Payroll Deduction: For employed taxpayers, payments can be deducted directly from their paycheck. This option may require additional paperwork and coordination with the employer.
- Online Payment Agreement (OPA): The IRS has an online platform where taxpayers can set up an installment agreement and make payments electronically.
- Check or Money Order: Taxpayers can also make payments by mailing a check or money order to the IRS.
It’s important to note that an Installment Agreement does not stop penalties and interest from accruing on the unpaid balance. Taxpayers are still responsible for paying these amounts. However, entering into an Installment Agreement can help taxpayers avoid more severe collection actions, such as levies or liens.
The terms of an Installment Agreement, including the monthly payment amount and the duration of the agreement, are based on the taxpayer’s ability to pay. The IRS will review the taxpayer’s financial situation and may request supporting documentation, such as income statements, bank statements, and expense records, to determine the appropriate terms.
Taxpayers must continue to file their tax returns on time while they are on an Installment Agreement and must continue to make the required payments. Failure to comply with the terms of the agreement could result in default, which may lead to more aggressive collection actions by the IRS.
In some cases, taxpayers may qualify for a reduced installment payment amount under the IRS’s Offer in Compromise program. This program allows taxpayers to settle their tax debt for less than the full amount owed if they can demonstrate that they are unable to pay the full amount due to financial hardship.
Before entering into an Installment Agreement or Offer in Compromise, taxpayers should carefully consider their financial situation and consult with a tax professional or financial advisor to understand the potential implications and to explore other available options for resolving their tax debt.
Offer in Compromise
However, the notion that you can easily pay the IRS a fraction of what you owe, as seen in some television commercials, is misleading. The IRS requires a specific form to be filled out for a compromise proposal, accompanied by a $186 filing fee. The form demands detailed information on your income, spending patterns, assets, and any investments you may have. If you earn wages or are self-employed, you’ll also need to submit a collection information statement detailing your ability to pay.
The IRS will assess your net worth and available credit sources, such as credit cards and home equity lines of credit. They will then compare your income with your monthly expenses to determine a manageable monthly payment.
You are not eligible to apply for a compromise if you have an active bankruptcy filing. If accepted, you will have two years to settle your tax debt under the terms of the compromise agreement.
The IRS may consider a settlement, known as an offer in compromise, where you can pay a reduced amount of your owed back taxes.
Wage Garnishment
If you owe money to the IRS and don’t have a payment plan in place, they can start garnishing your wages or federal payments (like Social Security or tax refunds). This continues until your debt is paid or the collection time limit expires. If you can’t afford to live on the remaining money, you can ask the IRS for a modification, and if approved, the garnishment amount might be reduced.
Innocent Spouse Programs
When you file a joint tax return with your spouse (even if you’re legally separated), you could be held responsible for any underpayment. However, the IRS provides relief for married or separated couples if one spouse hides a tax liability from the other.
To qualify, you must show that your spouse misled you by not reporting income or by taking improper deductions or credits. Generally, you have two years from the IRS’s first attempt to collect unpaid taxes to apply for relief.
The IRS offers two other relief options for couples dealing with tax reporting issues:
- Separation of Liability Relief: For divorced or legally separated partners who haven’t lived together for 12 months before seeking relief. This applies when one partner was unaware of incorrect information on a joint return.
- Equitable Relief: Available when a joint return wasn’t reported correctly or wasn’t paid, and it was solely the other spouse’s responsibility. It also applies when the joint return was correct but not paid on time.
Statute of Limitations
The IRS generally has ten years from the date of assessment to collect taxes, interest, and penalties. Some advisors may try to use this limitation to resolve a tax case, but it’s a risky strategy that could lead to increased interest and penalties if you fail.
Currently Not Collectible
If you can’t pay your taxes at the moment, the IRS can label your case as “currently not collectible,” putting a hold on tax levies, wage garnishments, and property liens. However, this status is temporary, and the IRS will inform you when they expect payment.
Working with a Tax Professional
Hiring a tax professional or attorney for help with a compromise application can be beneficial, especially if your dispute is complex or involves a significant amount of back taxes, interest, and penalties. As a general guideline, if your debt is under $10,000, contacting the IRS directly may be best; if it’s over $25,000, it’s advisable to seek professional assistance.
Bankruptcy: Does It Work?
Bankruptcy could eliminate your tax debt, but it’s not guaranteed. You need to assess your financial situation based on Chapter 7 and Chapter 13 bankruptcy codes to see if you qualify for a discharge of tax debt. Keep in mind that bankruptcy can have long-term financial consequences, affecting your credit rating and asset liquidation.
Other Tax Relief Options
If you can lower your tax debt to $50,000 or less, you could qualify for an IRS installment payment plan. Using credit cards, particularly those with cash-back rewards, might be a strategic approach to pay down your tax debt to $50,000, but it’s essential to create a budget and discuss your plan with a debt management or credit counselor.
In conclusion, if you enter an installment agreement with the IRS, ensure you make all payments on time to avoid penalties and back interest on your tax debt.