Are you unable to pay your taxes before the fast-approaching filing deadline? Are your tax bills amounting to an outrageous sum that you cannot be able to clear in time? Whatever the case, pending bills, more so taxes, can be quite the headache because failure to pay up can damage your credit score, cost you lots of interest and additional penalties and, in some extreme cases, lead to criminal prosecution. This can be such an exacting moment but do not get too worked up. This article will provide you with some tips to help you avoid the repercussions highlighted above. Here is what to do in such a situation:
1. File Your Tax Returns Anyway
Even if you cannot attain the full amount to clear your due taxes, you should still file your returns by the filing deadline. Failure to file your returns while owing taxes will earn you the ‘failure to file’ penalty which is a hefty 5 percent of your due tax each month from the filing deadline to a maximum of 25 percent after which it accrues a 1 percent monthly interest. In comparison, failing to pay the due tax after filing will only earn you a small penalty of 0.5 percent of the tax due monthly until you complete the payment in full. Filing, therefore, saves you some money with the reduced penalties while you clear the balances.
2. Start By Paying What You Can
It would also be wise to start paying off the debt in order to reduce the number of penalties and interest you are bound to incur. This may mean borrowing from friends and family, taking a personal loan, digging up your savings, using your credit cards or taking some money from your retirement savings. For example, if you owe $5000, you will be charged interest and penalties coinciding with that whole amount but if you manage to clear part of the amount and remain with a $2500 balance, your penalties and interests as well go down significantly.
Be careful however to weigh out the pros and cons of whichever means you will decide to use. For instance, the IRS charges a convenience fee of 2.49 percent of your tax due if you use your credit card. You may also incur tax penalties if you decide to pull out money from your retirement savings. It is best if you opt for such as the last resort.
3. Apply For An Installment Agreement
An installment agreement is a payment plan with the IRS that allows individuals to pay their tax debt in monthly payments over an extended period of time. Here, you will get to suggest your own payment terms say, how much you will be able to pay monthly and agree to have the amount automatically debited from your account to make work easier. For example, if you owe $3000, you can decide to pay $100 at the beginning of every month. There are short term and long term payment plans for your choice depending on how long it would take you to clear the balance. Additional payments and interests are also inclusive though much lower than you would have incurred had you borrowed from other lenders. To request an installment plan, you can personally submit the Form 9465 at an IRS office or do it via phone or mail.
4. Request An Offer In Compromise
An offer in compromise (OIC) by the IRS lets you settle the tax due for an amount less than that which is owed. For instance, you owed $15000 but you are only able to pay $500. An OIC is often considered as the last resort when you have explored all other means and still cannot be able to pay. You can only qualify for an offer in compromise after approval by the IRS meaning you have to pass all the eligibility requirements based on your income, ability to pay, assets and expenses. You may qualify for an OIC if:
- There is a doubt as to liability – whether the IRS correctly determined the amount you owe.
- There is a doubt as to collectability – whether your assets and income are less than the amount you owe.
- There is a basis of effective tax administration – The debt is correct, and you are able to pay the debt in full, but doing so would cause undue economic hardship.
The following are some of the reasons that may disqualify you from getting an OIC:
- You are in an open bankruptcy proceeding.
- You have not filed the required tax returns.
- You have not made the required estimated tax payments.
- You are self-employed, have employees and you have not submitted the required federal tax deposits.
Once you have applied and qualified, you can choose your preferred payment plan, either pay in lump sum cash or periodic payments. This process requires you to submit a complete personal financial statement and an application fee of $150 in addition to Form 656. Your application may or may not be rejected; therefore, it is important to be meticulous in the calculations and giving of details.
5. Apply For A Full-Payment Agreement
For short-term issues in which you will be able to pay your entire tax bill within 120 days, including any interest and penalties, apply for a full-payment agreement. Interest and penalties will still accrue until you fully pay, but there is no additional fee to apply.
6. Get Professional Help
Handling tax issues is not something you should do on your own. You may get the help of professionals such as Certified Public Accountants (CPAs) or Tax Attorneys and they will help you resolve the issues accordingly without much stress. Tax law defense attorneys are best suited to handle such matters since they have years of experience. They also know what to anticipate from the IRS officials and what is generally required of you as a taxpayer. Experienced tax defense will make a lot of difference in your case. For example, they can help you work out a suitable payment method or plan with the IRS. They could also help you get a waiver off some penalties and taxes.