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Receiving another tax bill can be frustrating, similar to the feeling of finding out your car won't start just as you're about to leave the house. However, if you find yourself owing money on your taxes, there are several options available to help you manage the situation. Here is some basic guidance to assist you in determining the best course of action.
Consider Opting for a Short Term Payment Plan
If you are having difficulty paying your tax bill due to temporary circumstances, you can file your tax return and then ask for an extension to settle the payment within 180 days.
There are no fees for establishing a short term payment plan, but interest and penalties will be applied until the full amount is paid. You can request a short term payment plan online if the total amount you owe is less than $100,000.
You may also be eligible for an extension through Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship. Remember, in order to qualify for any extension, you must file your income tax return on time before the tax deadline.
Consider a Long Term Installment Agreement as an Alternative
One common strategy for addressing an outstanding tax bill is to establish a long term installment agreement, enabling you to repay your tax debt over a six-year period. If the total amount owed is $50,000 or less and you have filed all necessary returns, you can apply for an installment agreement using the IRS Online Payment Agreement Application.
The IRS does charge a setup fee for a long term installment agreement, and interest and penalties will continue to accrue until the debt is completely paid off. However, the interest rate decreases from .5% to .25% per month while the installment agreement is in effect.
The IRS typically responds to installment agreement requests within 30 days. Various convenient payment methods are available under an installment agreement, such as direct debit, payroll deduction, check, money order, Electronic Federal Tax Payment System (EFTPS), credit card, and Online Payment Agreement (OPA).
If you choose automatic monthly payments via direct debit when applying online, the setup fee is $31; otherwise, it is $107 if you apply by phone, mail, or in person.
Applying for a revision of an existing installment agreement online incurs a fee of $10, while applying by phone, mail, or in person involves a fee of $89.
It is advisable to start the process online to avoid potential delays. It is essential to set a monthly payment amount that you can manage to prevent defaulting on the agreement and specify the payment date between the 1st and 28th of each month.
Explore the Option of an Offer In Compromise
The Offer in Compromise requires a $205 application fee, except for individuals who meet Low-Income Certification guidelines and are exempt from this fee. If you are unable to pay your tax bill due to permanent reasons such as job loss or business failure, you can request an Offer in Compromise (OIC) from the IRS.
Through an OIC, you can negotiate with the IRS to pay a reduced amount of your taxes, which the IRS will accept as full payment. To be eligible for an OIC, all filing and payment obligations must be up to date, and individuals in bankruptcy proceedings are not eligible.
Temporarily Suspend the Collection Process
This option is suitable if you anticipate being unable to pay your full tax liability in the near future, different from a short term hardship. If you are unable to pay any of your tax debt, your account may be designated as "currently not collectible," allowing the IRS to temporarily postpone collection until your financial situation improves.
Being classified as currently not collectible does not erase the debt; it simply means the IRS recognizes your current inability to pay. Before approving the delay in collection, you may be asked to complete a Collection Information Statement and provide evidence of your financial status, including information about your assets, income, and expenses.
Whichever option you select, it is crucial to initiate the process promptly and maintain open communication with the IRS regarding your circumstances.
Aragon Tax Return Services is available to assist you in negotiating directly with the IRS on past due bills, liens, levies, and any intimidating letters you may not have the patience for.
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