First of all, don’t despair and start thinking that you’re in an impossible position with no way out. There is a lot of help available to rescue you and guide you as you make your way out of the spot you’re in. Secondly, don’t imagine yourself all alone in your predicament. Every year, literally millions of taxpayers find themselves behind on the taxes they owe. This could be caused by unexpected factors such as illness, an economic downturn, natural disaster, employee theft, or other criminal activities. But no matter the cause of the problem in your case, please rest assured that there are extensive resources available to help you out.
The most important source of help needed to get your taxes paid is the IRS itself. Okay, I know this statement sounds a bit odd – something like saying call the tobacco company if you need help giving up smoking – but think about it for a minute. The job of the IRS is to collect taxes, using the tax law to calculate the correct amounts owed by taxpayers. As a result, they want to get the money that you owe them, and they have a lot of tools at their disposal to make reluctant taxpayers pay up. But if they threw the book at you on day one, they might force you into bankruptcy and ruin your credit rating for your future earning capacity. This might also mean that they would be able to collect a lot less in taxes from you in future years. The IRS understands that not every taxpayer can immediately pay what they owe, and so instead of taking a slash-and-burn approach as we just described, the IRS offers a number of different programs to help you find your way out of your tax debt. In other words, the IRS can be your friend if you need help paying taxes. (Another odd statement, I know, but bear with me and you’ll see what I mean.)
To help us discuss the IRS programs that are available to help you pay your taxes, we’ll use an example. Let us assume that you have just completed your tax return and have found that you owe the IRS $15,000, which is an amount well beyond your current capacity to pay.
Although you don’t have the money now, but expect you will have it in the future, the first option you could consider would be to apply for an extension of up to 6 months to pay the $15,000. This extension may be granted under certain circumstances, such as for single-income taxpayers who have just lost their job and will be off work for a short period until they can start their new job. Or it might be granted to someone who is planning to take time off work for a few months while they nurse a sick relative. The general principle involved is that if you can show evidence that paying the full amount now would cause you undue hardship, the IRS may give you a few months extra. However, it’s important to note that although your deadline to pay would be pushed back for 6 months if the extension is granted, the IRS would continue to add interest to your debt until you have paid it in full. And more importantly, the IRS will also add on penalties if you miss the deadline.
But if it turns out that you are not able to meet the conditions for the “undue hardship” 6-month extension, you could apply for what the IRS calls a Short-Term Payment Plan. In this program, you would still be expected to have paid the full amount you owe within 6 months, but penalties and interest would apply throughout the whole period until you have made the final payment. However, you could reduce the overall amount of the penalties and interest if you were able to make a series of regular payments during the 6-month period and got the debt paid off before the deadline.
Although we are using the example of a $15,000 tax debt, the nature of your particular cash flow situation might mean that 6 months would not be enough time for you to pay the entire amount. In this case, you could apply for an Installment Agreement where you would make monthly payments over a period as long as 6 years. The IRS charges a fee to set up such an agreement, and interest and penalties continue to be added to the balance of your debt until the final amount is paid. A detailed application is required for participation in an installment agreement, but this system of payment has proved to be successful for many taxpayers to resolve their issues with the IRS.
More details about how to get help from the IRS to pay the money you owe them can be found in this earlier article or on the IRS website.
Just to be clear, you (or your representative) must submit an application to the IRS to participate in any of the above programs. Acceptance is not guaranteed, and this is why the tax professional community is another source of help that can be very valuable for you as navigate your way forward for paying the taxes you owe.
Rather than trying to make sense of the available options on your own, you could call one of our experienced tax professionals for a cost-free and obligation-free discussion of your particular situation. He or she will be happy to help you figure out the best IRS tax debt settlement option for you and help restore your peace of mind.