Always, Always File
First and foremost, you should never avoid filing your taxes to try to avoid bringing your tax debt to the IRS’s attention. The only thing this accomplishes is adding failure to file penalties to your existing debt. It is far better to file on time—or, better yet, file early—and work with the IRS to pay off your tax debt in another way. The IRS is usually very willing to work with taxpayers who are earnestly trying to pay their taxes, especially if you’ve always paid your taxes in the past. Here are some of the ways that the IRS typically allows taxpayers to pay off their debts.
Short-Term Payment Plan or Extension
Please be aware that an extension to pay, also known as a short-term payment plan, is not the same as an extension to file. If you’ve filed for a tax extension, this gives you an extra six months to get your paperwork in order and submit a full tax return; however, you’re still expected to pay what you owe by April 15th. Please do not assume that filing for a tax extension will also push back your payment due date.
If you need an extension to pay, you can request a short-term payment plan form the IRS either by phone or via their online payment agreement application; your Provo CPA can also contact them or submit the application on your behalf. This gives you an additional 120 days to pay off your tax bill. It’s an ideal solution if you just need a little bit more time to pull together enough funds to pay your debt.
For example, you might request a short-term payment plan so that you can take out a loan, liquidate some assets, or open up a home equity line of credit. This would give you enough time to get those funds together so that you can pay the IRS. These extensions don’t typically come with a setup fee, but your tax debt will still continue to accrue interest and penalties until it’s paid in full, so it’s in your best interest to settle it as quickly as possible.
Long-Term Monthly Payment Plans
If you don’t have a way to come up with the funds for your tax debt in 120 days or less, you can request a long-term payment plan via the link provided above or by calling the IRS directly. A long-term payment plan sets you up to make monthly payments to the IRS until your tax debt is paid in full. Any tax refunds you may qualify for during this time would be surrendered towards paying off your debt as well.
These require a bit more paperwork to set up than a short-term payment plan, but can still be quite easy to get, depending on how much you owe. The larger the tax debt, the more paperwork and effort involved in setting up the payment plan. Most often, you’ll want to set up a payment plan using direct debit or payroll deduction. Each month, the IRS will withdraw the agreed-upon monthly payment amount until your tax debt is paid.
Again, you will continue to accumulate interest and penalties on any unpaid amount each month. However, if this is your first time not paying your taxes in full, at the end of your payment plan, you can contact the IRS and request a first-time abatement of the penalties.
Offer in Compromise
If you have little to no income, no income prospects in the future, and very few assets, you may be able to qualify for an offer in compromise (OIC). OICs are quite rare and can be difficult to qualify for. If you do qualify, however, you can settle your tax debt for less than you actually owe. You’ll need to fill out the application packet and submit an offer for the amount you believe you can pay. The IRS will thoroughly investigate your assets and income to determine if the amount you’re offering is the most they can reasonably expect to collect.
If they agree to your OIC, you’ll have to pay the full offer amount, and you’ll be expected to file and pay your taxes each year for the next five years. If you keep to these terms, your remaining tax debt will be waived.
If your tax bill was much higher than anticipated this year, and you simply can’t afford to pay it all at once, contact The Accounting Guys and speak to a Provo CPA. We can work with the IRS on your behalf to see if you qualify for a payment plan or OIC.