What to Do When You Can’t Pay Taxes: Practical Solutions and Expert Advice – it’s a question that many taxpayers dread. Tax season can be stressful, especially when you find yourself unable to pay the taxes you owe. But don’t panic. There are practical solutions and expert advice available to help you navigate this situation.
Understanding Tax Debt
Before diving into solutions for tax debt, it’s crucial to understand what tax debt is and how it accrues. Tax debt refers to unpaid taxes owed by an individual or business entity. This may include overdue income tax, self-employment tax, payroll taxes, state taxes, or other types of federal withholding tax. Interest will accumulate on any unpaid balance at the prescribed rate until paid.
Common reasons people fall into tax debt include:
- Inaccurate calculations
- Failure to file returns
- Ignorance of deadlines
- Overdue payments
Being proactive in managing finances throughout the year can help taxpayers avoid these situations altogether.
Options for Handling Tax Debt
When faced with owing back taxes that they cannot afford, individuals have several options for resolving their liability.
Installment Agreement (IA)
An installment agreement allows taxpayers who cannot pay their full amount due when filing their returns a chance to bring their account current by repaying monthly over time-based on ability-to-pay parameters established by IRS guidelines.
- Self-employed taxpayers must demonstrate positive cash flow through financial statements.
- Taxpayers seeking IAs must not owe more than $50 thousand in combined total amounts per all active installment agreements under this program.
- The taxpayer must have filed all necessary prior-year returns before applying for IA acceptance.
- Interest charges will apply during the repayment period; however, penalties cease upon acceptance.
Offer in Compromise (OIC)
An offer in compromise is an approved settlement agreement between the taxpayer and the IRS where a smaller amount to payoff is accepted as full satisfaction of the overdue taxes. To qualify:
- The taxpayer must not have an open bankruptcy case
- The offer must represent the highest amount that taxpayers can pay back over time
- The taxpayer must be current with all estimated tax payments.
It’s important to note, if you do qualify for Offer in Compromise, there are fees associated with the application process.
Currently Not Collectible (CNC)
A CNC status allows for temporary suspension of collection efforts until the taxpayer’s economic condition improves or changes. This option requires extensive financial disclosure by way of Form 433-F Financial Statement Collection Information Statement.
While CNC status stops any collections actions, accrued interest and penalties continue accruing on your account balance until paid off or resolved through another means.
Under limited conditions, taxpayers may include their federal income tax liabilities in bankruptcy filings at both State and Federal Levels. This strategy should only be used when other remedies are exhausted, advised by legal counsel after consultation with an experienced BK-tax attorney.
Expert Advice on Resolving Tax Debt
Navigating through tax debt can be complicated but seeking professional advice can help ease stress levels during difficult times. Here are some expert tips from trusted sources:
- Work closely with a Certified Public Accountant (CPA), Enrolled Agent (EA), or licensed attorney who specializes in taxation law for complete analysis and realistic insights into options available.
- Take advantage of programs offered under the Fresh Start Initiative such as streamlined installment agreements.
- Tax return preparation – file all required returns including late filers will avoid imposition of additional penalties; also, it will ensure compliance so future applications such as refunds go more smoothly.
Online Payment Plans
The IRS offers online payment plans for those who qualify. These include:
Short-term payment plan
This plan is for those who can pay off their outstanding balance in 120 days or less. The total amount owed must be less than $100,000 in combined tax, penalties, and interest.
Long-term payment plan
This plan is for those who need more than 120 days to pay off their balance. Payments are made monthly, and the total amount owed must be less than $50,000 in combined tax, penalties, and interest.
If the IRS approves your long-term online payment plan (also known as an installment agreement), a setup fee may apply depending on your income.
Impact on Collection Period
If you request an installment agreement, the time the request is pending pushes out, or suspends the running of, the initial ten-year collection period. An installment agreement request is often pending until it can be reviewed, and an installment agreement is established, or the request is withdrawn or rejected.
If the requested installment agreement is rejected, the running of the collection period is suspended for 30 days. Similarly, if you default on your installment agreement payments and the IRS proposes to terminate the installment agreement, the running of the collection period is suspended for 30 days.
If you exercise your right to appeal either an installment agreement rejection or termination, the running of the collection period is suspended by the time the appeal is pending to the date the appealed decision becomes final.
In conclusion, owing back taxes can feel overwhelming but viable solutions exist to resolve delinquent balances. Proactive management of your finances is crucial to avoid falling into tax debt. Always keep in mind that seeking expert advice from experienced professionals can also help ease the burden of such situations. If you’re struggling with unpaid taxes, consider one of the solutions offered and seek out expert support for a solid resolution.
Q: What happens if I don’t pay my taxes? A: If you don’t pay your taxes by the deadline, which is typically April 15th in the US, you may face penalties and interest charges on the unpaid amount. The IRS may also pursue collection actions against you, such as wage garnishment or placing a lien on your property.
Q: Can I get an extension to file my tax return even if I can’t pay? A: Yes. You can file for a six-month extension to submit your tax return by submitting Form 4868 before the tax filing deadline. However, this does not give you an extension on paying any owed taxes. Interest and penalties will still accrue from the original due date until payment is made.
Q: What should I do if I cannot afford to make full payment of my taxes? A: If you cannot afford to pay your full tax bill at once, there are several options available including setting up a payment plan or making an Offer in Compromise (OIC). Additionally, it’s important to contact the IRS as soon as possible and discuss payment options that are available for those who experience financial difficulties.