So you’ve prepared your return and you owe the IRS but you don’t have the money to pay. Now what?
The feeling of having to pay taxes, especially when you owe more than you were expecting, can be a dreadful feeling and can leave some taxpayers in a financial bind, but there are steps that you can take to reduce the burden and the stress of owing money to the IRS. First off, don’t panic. Instead consider these steps for settling your tax debt and getting yourself back on track with the IRS.
If you can’t pay your tax liability in full at the time of preparing your return, it doesn’t mean you shouldn’t file your return. According to the IRS, tax returns are due, regardless of whether or not you can pay in full. By filing your tax returns, whether they are current or past due, you can limit interest charges and late payment penalties, retain your claim to a refund, protect your Social Security Benefits (for self-employed individuals), and avoid issues obtaining loans or federal aid. If you cannot pay in full, you should send as much as you can with your return at the time of filing.
Contact the IRS
Every situation is unique and the IRS is willing to work with taxpayers. In some cases, the IRS can waive penalties and fees if you can show good cause. Under some circumstances, the IRS can grant relief by providing additional time to pay or temporarily delaying the collection process if you cannot pay your tax debt in full. If you file your return with an underpayment of taxes and you don’t contact the IRS, chances are you’ll receive a notice from the IRS requesting payment on demand.
Request a Payment Plan or Installment Agreement
The IRS offers payment plans and installment agreements for taxpayers who are not able to pay their tax debt in full. Depending on your circumstances, you may qualify for a short-term payment plan (paying in 120 days or less) or an installment agreement, long-term payment plan, (paying in more than 120 days). For short-term payment plans, apply online, by phone, mail or in-person at your local IRS office. For more information regarding installment agreements, refer to Form 9465 Instructions, Installment Agreement Request. When considering a payment plan or installment agreement, determine how much you can pay on a monthly basis. Send in as much as you can but be realistic to avoid default. If your circumstances change, payment plans and installment agreements can be revised by contacting the IRS.
Offer in Compromise
An offer in compromise allows taxpayers to settle their tax debt for less than the full amount owed. The IRS will consider the taxpayer’s ability to pay, income, expenses, and asset equity prior to making any determinations. For more information regarding offers in compromise, refer to IRS Form 656 Booklet, Offer in Compromise.
Things to Consider
Owing money to the IRS can be burdensome and nerve-racking, especially if your tax liability is more than you can afford. To avoid underpayment of taxes at the time of filing, we recommend assessing your tax situation throughout the year. Make your estimated tax payments as scheduled and/or review your withholdings from wages, or other sources of income, to cover as much of your anticipated tax liability as possible.
Also, consider tax planning to avoid a surprise at the time of filing. Speak with your trusted tax professional to help you assess your tax situation and consider possible tax saving strategies. One of the best strategies for avoiding a surprise at the time of filing is to be proactive throughout the year. The IRS also offers a tax withholding estimator for individual taxpayers, which can be found on the IRS website. A withholding or simple tax projection calculator can give you an idea of what to expect at the time of filing.
As always, our CPAs at Mason + Rich are ready to answer any additional questions. Feel free to call us at 603-224-2000.