After hours of slaving over your taxes, you’re finally ready to see your refund. Or at the very least, you’re prepared to write a small check to cover your taxes.
You click the finish button and want to faint. I’m sorry, how much??
Great. You owe back taxes. Now what?
First off, don’t panic it’s okay. You’re not the first person to owe the IRS. In fact, you’re one of over 30 million. So don’t beat yourself up.
Now that we’re ready to approach the issue with a level head, let’s talk about what to do when you owe the IRS back taxes.
I Owe Back Taxes. Now What?
First things first, file an extension Form 4868. This will give you a bit of time to go back over your taxes – especially if they’re self-prepared.
Take your taxes to a professional and have them double check your work. It’s very easy to repeat a number or miss a deduction. A good tax professional can save you hundreds or thousands of dollars, depending on your case.
But even after you file your extension, pay as much toward the balance as you can. Otherwise, you can face extra penalties, like interest and late filing charges. These can add up to an extra 100% of your balance.
Can You Pay the Full Balance in 120 Days?
If you can pay the full balance in 120 days or less, request a short-term extension. There’s no fee to request the extension, but there is a 0.5% interest per month on the remaining balance.
Since there’s no application fee for the short-term extension, it’s a cheaper option than the Installment Agreement. But, you do still get charged interest and late-payment penalties.
To set up a short-term extension, call the IRS at (800) 829-1040 or get a professional to help you.
Set up an IRS Installment Agreement
If you owe $50,000 or less (hopefully all of us?) you can set up an Installment Agreement. That’s pretty much a payment plan on your taxes.
Registration fees to set up the payment plan range from $43 to $149. Fill out Form 13844 for the lower application fee. You are only eligible for the lower fee if you’re a low-income taxpayer.
The IRS has to allow you to make payments if you meet any of the following requirements:
- You owe $25,000 or less
- You prove you can’t pay the amount you owe now
- You can pay off the tax in 3 years or less
You will still get charged an interest fee of 0.25% per month on the remaining balance until you pay it in full. Still, if you can’t pay it in full right away, this is likely your best option unless you can pay in 120 days or less.
If you don’t pay your Installment Agreement on schedule, the IRS can void the agreement. So it’s best to focus on this bill right up there with rent payments.
Furthermore, you must pay your debt in under 72 months, or 6 years.
And finally, note that there is a 10-year collections statute of limitation on your taxes.
Apply for Hardship Extension
If you’re struggling, you can apply for a hardship extension. There’s no cost to apply, and no associated penalties, but you still have to pay interest.
You must be able to prove that paying your taxes would cause a financial hardship for your household. You have to prove your current income barely covers living expenses.
Once accepted, the IRS will transfer your tax file to a Currently Not Collectible status. While it waits, it will collect interest. The IRS will continue to watch your finances. When it looks like your financial situation has improved, they will try to contact you again.
To file for a hardship extension, you have to File IRS Form 1127. You must include a statement of your assets and liabilities.
Borrow It from Elsewhere
Being on a payment plan, while intimidating, isn’t that bad. The interest is pretty low, especially compared to credit cards or personal loans. But if you don’t like being in debt to Uncle Sam, you can borrow the money to pay your taxes from elsewhere.
Keep in mind that interest on your taxes is low compared to credit cards and personal loans. If you take the money out of a retirement account, you’ll have t handle extra fees and might have to count it as income. Besides, retirement accounts are for retirement.
Offer In Compromise
Ever hear those commercials offering to settle your tax debt for much less than you owe? They’re likely helping you apply for an Offer in Compromise. But you’ll have to offer your net worth. That’s everything you own, minus your debt.
An Offer In Compromise is an extreme last resort – it’s a lot like bankruptcy. Think this option through before pursuing this route.
Do’s and Don’t’s
So what should you do and what should you avoid when you owe the IRS back taxes?
Don’t ignore IRS notices. The IRS knows how often they’ve tried to contact you. Especially if they send certified mail, you can’t hide.
Do file your taxes anyway. Even if you owe a lot of money. If you don’t file, you face extra late-filing penalties and late payment penalties. You’re best off when you face the issue straight on and file.
Do talk to a tax expert. They may see deductions you missed or an extra zero here or there. Plus, they’re professionals. They can guide you through the stressful process of owing the IRS.
If I Don’t Pay, Do I Go to Jail?
Don’t worry. Unless you’re committing tax fraud or tax evasion, you cannot go to jail for an inability to pay your taxes.
But, the IRS can use the following tactics to get the money you owe them:
- File a tax lien against you
- Levy your bank account
- Garnish your wages
- Close down your business
- Seize and sell your home
- Damage employment and business relationships
- Assess you personally for corporate employment taxes
- Put you in a monthly installment payment arrangement that is too high
- Contact your banker, neighbors, friends, and business relationships about your tax liabilities
- Go after third-party transferees of your assets.
Real people work at the IRS. they get that life happens, and they’re willing to work with you, so long as you’re willing to work with them.
The IRS Will Work With You
It’s not the worst thing in the world to owe back taxes. Do your best to file your taxes on time and be willing to work with the IRS. Get a tax professional to help you along the way.
Worried about your taxes? We can help! Get a free consultation here.
