No one likes unexpected expenses, especially large unexpected expenses. This time of year, one such expense can be income taxes. You’re probably aware of this year’s April 18 filing deadline, but maybe you weren’t prepared to owe additional tax. Even worse, perhaps you weren’t prepared for how much you have to pay.
Self-employed people are common candidates for income-tax bill shock, especially if you had a really good year in 2016 but didn’t make sufficient quarterly payments. Or maybe you had a tough year, including a time of unemployment, which has left you short on funds to pay this year’s bill.
Before we get to some options for squaring things up with the IRS, it’s important to note that even if you can’t pay the full amount you owe, you still have to file your income-tax return (or request a filing extension) on time. Not filing will typically cost you a penalty of 5% of the amount you owe for each month you’re late, plus interest. Even if you can’t pay on time, filing on time will mean a much lower penalty—0.5% to 1% of what you owe, plus interest, per month. So be sure to file your return on time and pay as much as you can.
Next, you’ll have to figure out how to pay what you owe. Don’t let this slide. Uncle Sam can be a patient creditor if you’re in touch with him and work things out. He’s even made it easier to qualify for the programs described below. However, if you give him the silent treatment, he may play hardball—garnishing your wages, taking money from your bank accounts, or slapping a lien on your property.
Don’t let things get to that point. Instead, explore the following options:
- Short-term Agreement
If you think you can pay all of what you owe within 120 days of April 18, apply for a short-term agreement online (you’ll find out if you’re approved right after entering the required information) or call the IRS at 1-800-829-1040. There is no fee for a short-term agreement, but penalties and interest will be charged. Still, they should amount to less than what you’d have to pay with a longer-term payment agreement.
- Installment Agreement
If you can pay what you owe but you’re not going to be able to do so within 120 days, apply for an installment agreement, which may allow you to make monthly installments over the course of up to 72 months. If you owe $50,000 or less, you should be able to set up an installment agreement online. If you owe more than $50,000, you may need to supply the IRS with a Collection Information Statement (Form 433-A or 433-F, available at www.irs.gov). There is a fee of $225 to establish an installment agreement, or $107 if you agree to have your payments automatically deducted from your bank account.
- Temporary Delay
If your circumstances are such that you’re not sure when you’ll be able to pay, call the number above. The IRS may temporarily delay collection until your financial condition improves. However, your debt will grow because penalties and interest will be charged until you come up with the full amount. During the temporary delay, the IRS will continue to review your ability to pay.
- Offer in Compromise
If it isn’t realistic for you to ever pay what you owe, or if paying would create a financial hardship for you, an offer in compromise may enable you to settle your tax debt for less than you owe. Whether you’ll qualify depends, in part, on your income (you must earn less than $100,000), expenses, asset equity, and the IRS’ assessment of your ability to pay. Historically, relatively few offers in compromise have been accepted, although the rules have loosened in recent years.
There is a non-refundable $186 application fee and most applicants have to make an upfront, non-refundable partial payment when they apply. If you’re offering to settle with a lump sum payment, you’ll have to submit 20% of that amount when you apply. If you are offering to settle by making monthly payments, you’ll have to submit the initial payment with your application and keep making those payments as you wait to hear whether your offer has been accepted.
- Avoid Outside “Assistance"
You may be tempted to turn to a private company for help in settling your tax debt for less than you owe through an offer in compromise, but beware. Such companies often charge steep upfront fees, and there are some unscrupulous players in this field. In fact, what was once the nation’s largest tax-resolution company went bankrupt after being sued in numerous states over allegations that it misled consumers and failed to produce results. The Federal Trade Commission offers tips and warnings related to working with private tax-settlement companies.
- Consider Inside Assistance
If you are having a difficult time resolving an IRS tax dispute, contact the IRS Taxpayer Advocate Service. This is an independent organization within the IRS designed to provide free help to taxpayers experiencing significant hardships. To get in touch or to learn more about your options if you can’t pay your tax bill, visit their web site or call 1-877-777-4778.
If you’re struggling to pay your bills, you may be tempted to ignore the problem. But creditors are more likely to work with people who contact them, explain the situation, and express a commitment to pay. As the options described above demonstrate, that’s true even of the IRS. For more guidance on what to do if you can’t pay your tax bill, read, The ‘What-Ifs’ for Struggling Taxpayers on the IRS web site.