Most people begin filing their taxes with some expectation of what the outcome will be; based on past years, you probably have a general idea of how much you’ll owe or how large of a refund you’ll receive. But sometimes (either because of changes in your financial situation or changes in tax laws) you finish filing your tax return and find yourself with a much larger tax bill than expected. If you don’t have the liquid assets to pay this tax debt when you file, you might find yourself wondering what you can do. Keep reading to learn more about potential IRS payment plans.
Don’t Skip Filing
First, we want to make it clear that simply not filing your tax return will not, in any way, help you to “avoid” that unpleasant tax bill. The only thing not filing your taxes will accomplish is landing you with a failure to file penalty on top of late payment fees and interest. You should always file your tax (or a request for an extension) on time, regardless of what your tax bill will be. Now, let’s look closer at the options that the IRS offers for tax payers to pay off their tax debts, if they can’t pay them in full.
Short-Term Payment Plan
A short-term payment plan is also sometimes called a payment extension—but please note that this is not the same as the request for an extension to file. When you file an extension, you are given six more months to submit your tax return; but you’re still expected to pay what you believe you’ll owe on April 15th. If you’re filing for an extension, please do not assume that you also have an extension on payment.
To get an extension on your tax debt, you’ll need to request a short-term payment plan, which can be done either over the phone or through their online application. Our CPAs are also happy to assist you with this to ensure that the correct forms are filled out properly.
If approved for a short-term payment plan, you’ll be given roughly four months (120 days) to pay off your tax bill. This is an excellent solution for those who know they can get the money together for their tax debt, but just need a little extra time to do so. For example, a short-term payment plan is a good solution if you are waiting on a loan, in the process of liquidating assets, or are in the process of opening up a home equity line of credit. A short-term payment plan would give you enough time to gather these funds and pay off your debt.
It is important to note that your tax debt will continue to accrue interest and penalties until you’ve paid it off completely. So, you should still try to pay off your tax bill as quickly as possible to minimize any added cost.
Long-Term Payment Plan
Do you need more than 120 days to get your funds together? You can also use the link given above to request a long-term payment plan, or work with a CPA to request one from the IRS. This allows you to establish monthly payments with the IRS until your debt is fully paid. Any tax refunds you may qualify for while paying off this debt would also be surrendered to the IRS to help pay it off.
These require more paperwork than short-term payment plans, but it’s still quite common to have these requests approved, depending on how much you owe. The more you owe, the more difficult it can be. Typically, it’s best to set up a long-term payment plan using payroll deduction or direct debit with the IRS; this allows them to automatically withdraw the monthly payments until the tax debt is paid.
As mentioned in the previous section, your debt will still acquire interest and penalties for each month the debt is left unsettled. However, if this is the first time you haven’t paid your tax debt up front, once you’ve completed your payment plan and paid off your debt, you can request an abatement of those penalties by contacting the IRS.
Offer in Compromise
What if you have little to no income, very few assets, and no prospects for income in the future? In these cases, you may qualify for an offer in compromise (OIC). These are quite rare and hard to qualify for. To apply, you’ll fill out an application packet and submit an offer in the amount that you feel you can pay on your tax debt. The IRS will review your assets and income to determine if your offer is the most they can reasonably collect on the tax debt.
If they accept your offer, you will be expected to pay the offer amount in full. You’ll then need to file and pay your taxes on time every year for the next five years. If you follow these terms, your remaining tax debt will be waived.
So, if your tax debt ends up much higher than anticipated, contact one of our CPAs, and we’ll help you to figure out what IRS payment plans you might qualify for.
Article provided by: