Unfortunately, you can’t avoid paying the IRS back taxes. In extreme cases, that’s known as tax evasion and it’s against the law. However, there are a few things you can do take care of that unpaid tax balance. This includes filing an offer in compromise, agreeing to an installment agreement, or paying your tax bill using emergency savings or a personal loan.
Whether you work for a large corporation or have your own company, everyone pays a chunk of change to the IRS (usually in the form of income tax). With this in mind, it makes sense that many workers look forward to a refund come tax time. So it can be very disconcerting to find yourself with a hefty tax bill when April 15 rolls around.
Instead of contemplating how to avoid paying IRS back taxes, and possibly suffering from federal tax liens on your property, today we’re going to focus on what you can do if you’re having trouble paying your tax debt. There are a number of options available to clear up those tax bills, and hopefully one of them works for you. First, let’s take a quick look at what happens if you don’t pay your tax debt by the deadline.
Penalties and interest for unpaid taxes
First of all, it’s important to note that there are penalties both for failure to file your return and failure to pay your tax bill. This means there’s no incentive to file your tax return late. Secondly, even if you apply for an extended due date on filing your tax return, your tax liability is still due on April 15.
The failure-to-file penalty is 5% of your taxes due for each month or part of a month that a tax return is late. That said, the penalty won’t exceed 25% of your unpaid tax bill. The IRS calculates the late filing penalty based on the tax that remains unpaid after the due date. (Unpaid tax is the total tax shown on your return minus any amounts paid through withholding, estimated payments, and allowed refundable credits.)
The failure-to-pay penalty will cause both penalties and interest to accrue. The late payment penalty is 0.5% of the tax owed after the due date for each month or part of a month the tax remains unpaid, up to 25%. Ten days after the IRS issues a final notice of intent to levy or seize property, the 0.5% rate increases to 1% per month.
How much will this cost you?
If both a failure-to-file and a failure-to-pay penalty are applicable in the same month, the combined penalty is 5% (4.5% for late filing and 0.5% for late payment) for each month or part of a month that your return was late, up to 25%. The maximum total penalty for failure to file and pay is 47.5% of the tax. (22.5% for late filing and 25% for late payment).
As you can see, the combined penalties and interest for not filing or paying on time are severe and should be avoided at all costs. Remember to file your tax return on time regardless of your ability to pay. Once you file, then you can explore your options to get that tax bill taken care of.
What if you don’t pay at all?
If you don’t make arrangements, the IRS will take further action. First, they’ll send you a letter demanding payment. If you don’t respond, they may file a federal tax lien notifying creditors that the government has a right to your assets.
Next, they may issue a levy initiating the seizure of your property or begin garnishing your wages or bank accounts. In some cases, they will pursue criminal charges which could land you in jail for up to five years.
Is there any way to stop collection procedures?
If the IRS determines that you cannot pay any of your tax debt, they may report your account as “currently not collectible” and temporarily delay collection until your financial situation improves.
Unfortunately, being “currently not collectible” doesn’t mean the tax liability goes away. Instead, it means the IRS agrees that you cannot afford to pay the back taxes right now.
Don’t wait around until you’ve started getting threatening letters from the IRS. Start researching your options or contact a tax professional for advice right away.
Ask for a financial hardship extension
If you truly believe you don’t have any means to pay your tax debt on time, you can file Form 1127 — an application for an extension of time to pay taxes because of undue hardship. You should file this form and its supporting documentation as soon as you are aware of any tax liability.
If granted, the extension is typically no more than six months, but it’s not easy to get the extension. Along with filing the form, you must also submit a statement of all of your assets and liabilities in addition to an itemized list of your monthly income and expenses for each of the three months prior to the due date of the tax debt.
As mentioned, you must demonstrate extreme hardship. However, if your assets, income, and expenses do not support your claim of undue hardship, you will be denied. For example, if you’ve recently bought a car or made another large purchase, the IRS probably won’t grant you an extension.
IMPORTANT! The Internal Revenue Service does sometimes offer tax relief and/or filing extensions for victims of natural disasters, major storms, or other catastrophes. You may also qualify if you are considered an “affected taxpayer,” according to the IRS, even if you weren’t directly impacted by the disaster.
For example, if your tax professional is unable to complete your tax return on time because of a hurricane in their area, you would probably qualify as an affected taxpayer.
Apply for an installment agreement
Failing an extension for hardship, you might try a request for an installment agreement using Form 9465 or applying online. An installment agreement is an IRS payment plan and can range anywhere from 120 days to 72 months. There is a setup fee for installment agreements but these may be waived for certain reasons, such as for low-income taxpayers or if you can pay it off within 120 days.
Keep in mind that even if you’re on a payment plan interest will continue to accrue, which could significantly affect the total amount you end up paying. In that case, you may find that seeking private alternatives may be more beneficial to your overall financial situation.
One private option available to you may include a tax relief company. A tax relief company will communicate with the IRS on your behalf and attempt to lower your overall tax bill. However, these services also come with expenses, so make sure you compare multiple options before hiring a tax relief firm.
Request an offer in compromise
You may be able to get some tax relief by requesting an offer in compromise. This is an agreement between you and the Internal Revenue Service where you can settle your back taxes for less than you actually owe. Sounds good, but be aware that getting an offer in compromise is much more difficult than getting an IRS payment plan.
Plus, there are criteria you need to meet to even be eligible for an offer in compromise. For starters, the IRS considers your ability to pay, your monthly income and expenses, and your assets. In addition, you must:
- File all tax returns you are legally required to file.
- Have received a bill for at least one tax debt included in your offer.
- Make all required estimated tax payments for the current year.
- If you are a business owner with employees, make all required federal tax deposits for the current quarter and the two preceding quarters.
It should also be noted that if you’re in the process of filing bankruptcy, you are not eligible for an offer in compromise. In that case, follow our guides explaining the different kinds of bankruptcy and how to decide which (and whether) bankruptcy filing is right for you.
What if you’re approved for an offer in compromise?
If the IRS approves the offer in compromise, taxpayers have two different ways to pay their tax debt.
- Lump sum cash. This option requires an initial payment of 20% of the total offer amount, which must be paid at the time you submit the offer. The remaining balance must then be paid in five or fewer payments within five or fewer months of the date your offer is accepted.
- Periodic payment. This option requires you to make the first payment when you receive the offer. You’ll then pay the remaining balance in monthly payments within six to 24 months, in accordance with your proposed offer terms.
Be aware that if you opt for the periodic payment option, you must continue to make monthly installments while the IRS is evaluating your offer. If you fail to make these payments at any time prior to receiving a final decision, the IRS will return your offer and most likely keep your initial payment too.
If you have questions about your options, and would rather not pay a tax professional to help you, you can contact the Taxpayer Advocate Service for help. This is an independent organization within the Internal Revenue Service.
A tax expert can be reached at 1-877-777-4778 or online at IRS.gov/advocate. The services are free and they can answer your questions and even get copies of your tax records and transcripts, among other services.
Alternatives to IRS plans
When you calculate what you could end up paying with combined tax debt, interest, and penalties, you might want to come up with an alternative way to pay your back taxes.
- Apply for a personal loan. Personal loans are one way to pay when you owe the IRS. If you have good credit, you might be able to get an interest rate that would be more favorable than the combined interest and penalties you would incur from missing the tax deadline altogether.
- Borrow from yourself. If personal loans don’t appeal to you, see if borrowing from yourself is a feasible solution. If you have a bank account that holds your emergency fund, for example, this tax return problem likely qualifies as an emergency. You can also borrow some money from your retirement fund. However, you will incur tax and penalties for making an early withdrawal if you haven’t reached retirement age.
- Tap into your home’s equity. If you’ve built up some equity in your home, you might be able to get a home equity loan, home equity line of credit (HELOC), or home equity investment to pay your tax debt. These are typically easier to get than unsecured loans and usually come with lower interest rates as well.
- Use a credit card. Paying tax bills with a credit card may not be an ideal solution, but it is one payment option that can get the IRS agent off your back. And, depending on your personal finance situation, you might be able to apply for a credit card with a 0% introductory rate. Keep in mind that the IRS charges a processing fee of around 2%.
- You can’t avoid paying back taxes, but you can work with the IRS to pay them. For instance, you could set up a payment plan, file for an offer in compromise, or request an extension on the payment due to financial hardship.
- If you don’t pay your owed income taxes by the due date, penalties and interest will accrue on top of the unpaid tax balance.
- If you fail to file your tax return, you will also be on the hook for penalties.
- Rather than resorting to IRS payment plans, you may be better off getting a loan or paying with a credit card. Alternatively, you could borrow money from yourself through a home equity loan or line of credit or take money from your retirement savings.
View Article Sources
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- How To Settle IRS Tax Debt: All Available Options — SuperMoney
- What Is Tax Evasion? Methods & Penalties Explained — SuperMoney
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