Hopefully you do not find yourself in the position of owing income tax, but for those who do I wanted to provide this helpful tax debt information from guest author and tax expert, Matt Robinson.
Will you owe income tax this year?
With April 15th on the horizon, you may find yourself with an inability to pay your taxes. This happens not only to individuals who make estimated payments, but also W2 employees with other sources of income.
Avoid tax penalties
Do not be paralyzed by an inability to pay. Even if you cannot afford the tax owed, file a tax return! Failure to do so will trigger unnecessary penalties that will only increase your tax debt. The “failure to file penalty” is 5% per month on any balance due (up to 25%). If you cannot file by April 15th, request a filing extension using IRS Form 4868 which gives you until October 15th to file (not pay). When you file, it is best to pay as much as possible without sacrificing basic living necessities, as this will not only reduce the total amount you owe, but it will also reduce the failure to pay penalty. There are many different ways to become compliant with the IRS, with some options being a better fit for certain financial situations. Some of the most popular ways taxpayers resolve tax debt is through the use of a credit card, a personal loan, a home equity loan, or an IRS Installment Agreement. As you read the options below, understand that a credit card is a last resort long-term option.
Tax debt help – Situation 1
You only need a few weeks to come up with the money
If you need a few weeks to pay your taxes, it is best to send in a tax return with a small payment and wait for an IRS letter requesting the balance, which is normally 45 days after the due date. Although you may be charged a failure to pay penalty, 5% per month, and interest of, 4% compounded daily, it is a better alternative then the interest on a credit card. This additional time can also be useful in order to tap equity in your home, which will allow you to pay off your tax bill, or to get a personal loan; the interest is tax deductible. Many of us, with this economic downturn, may not have any home equity, or we cannot easily get a bank loan. If this is the case, keep reading.
Tax debt help – Situation 2
You need a lot more time and a home equity or personal loan is not possible or not for you
If you need more than a few weeks, the IRS can give you up to a 120 day temporary extension, if that is all you need, call them at 1-800-829-1040. If you think you may need more time, it is best to request an Installment Agreement from the IRS, which will allow you to pay your tax debt over time, which is generally over the time span of 3-5 years depending on the agreement. In order to request an Installment Agreement (IA), fill out IRS Form 9465 or use the Online Payment Agreement (OPA). If you owe $10k or less, you are “guaranteed” an IA by right of law. If you owe more than $10k but less than $25k, you can use the OPA, and normally, the IRS will not request a Collection Information Statement (CIS) from you to verify your financial situation. This type of agreement is referred to as a Streamlined IA. If you owe over $25k you cannot utilize the OPA and you will need to complete a CIS; you will need to use Form 9465. Regardless of the IA, you will have to state the amount you are able to pay each month, which must be more than the monthly minimum payment. To calculate the minimum monthly payment, take the total amount owed, plus interest and penalties, and divide by 30 for a guaranteed IA, or divide by 50 for a Streamlined or IA over $25k. In summary, look at this Installment Agreement like a loan as it will carry a .25% per month underpayment penalty and interest, which is currently at 4% compounded daily. Therefore, the faster you pay off your installment agreement, the less penalties and interest you will pay over the long-term.
Tax debt help – Situation 3
You need a lot more time and an installment agreement is not possible or is not a good fit
If your Installment Agreement is rejected or not a good fit you can apply for an Offer In Compromise (OIC). An OIC can be accepted if:
- Your tax liability is not correct
- The IRS feels they will not recoup the taxes by other means (doubt as to collectible)
- You are under severe financial hardship (which must be proven to the IRS).
The benefit from an Offer In Compromise is that you end up paying less than you owe, but it is only for taxpayers with extreme circumstances. Moreover, only 10-12% of OICs are accepted. You will start by completing IRS Form 656 and a Collection Information Statement. It is highly recommended with an OIC to use a tax professional, due to the simple fact that they are rarely accepted. If you know you will not be able to pay your taxes, the best advice I can give you is to be proactive and communicate with the IRS on a resolution. Failure to do so will trigger various tax penalties and additional interest that will add to your total tax bill. If you fail to pay after a series of IRS notices, you could be facing a tax lien and/or levies, which will only exacerbate the financial situation.
Will you owe income tax?
If you do owe income tax hopefully you have no trouble paying ASAP… but if you cannot afford immediate payment be sure to utilize the advice that works best for your unique situation.