Sometimes it only takes six little letters to strike fear in the bravest of taxpayers: IRS IOU (technically, it’s not an IOU, but rather a bill). When reading these strategically ordered letters, our secret inner spirit animal that protects us from all things tax-related kicks-in, and we head for the nearest sandy spot to bury our heads, hoping the IRS will not see us as they knock on our door. As the stress that the IRS will see you despite your sandy hiding place builds, your mind begins to wander to times gone by where, the biggest decision you had to make was which ice cream flavor will refresh you the most on a hot summer’s day. If only dealing with the IRS could be that refreshing!
If taxes are not paid by the original filing due date of the return (for most individual taxpayers this is April 15th), additional interest and penalties may accrue on the balance due until it is fully paid. This is true even when an extension is filed, as an extension provides additional time to complete a tax return, but not to pay the tax that is due. Sometimes taxpayers will decide to postpone the filing of their tax return because they know they owe tax that they cannot pay. They may file an extension, or decide not to file at all until they have the money to pay the tax due. Although this may seem like a “prudent solution,” in the long run this strategy can be costly and may increase the number of sleepless nights you experience exponentially. When a return is filed late and the tax due is left unpaid, more than likely the IRS may impose both late filing and payment penalties. Additionally, interest will accrue on these penalty amounts until they are paid in full.
A better strategy is to consider filing your return timely, even if you are unable to pay the tax right away. By filing, you will save yourself the late filing penalty, referred to as Failure-to-File penalty. The act of filing kicks-in the statute of limitations on the amount time the IRS has to examine the return. Additionally, the statute of limitations on the time the IRS has to collect the unpaid tax due begins to run. With the exception of a few circumstances, the IRS has three years from the date the tax return is filed to examine and assess additional tax due, and ten years to collect any unpaid taxes due.
As scary as it might seem, it is always best to contact the IRS to discuss payment agreements when you owe taxes rather than ignoring letters from the IRS requesting payment. Unfortunately, for the IRS, out of sight does not mean out of mind. Communication is crucial when resolving issues with the IRS. If payment requests continue to go unanswered, the IRS may begin collection enforcement actions such as placing a lien on your home, garnish wages or retirement income, and even levying your bank or investment accounts.
Sometimes you may only need a few weeks reprieve to fully pay the tax due. Perhaps you are waiting for your state refund or an expected bonus at work. The IRS offers taxpayers an extension to pay for up to 120 days. There are no set-up fees, and the extension can be requested online at the IRS website, by phone, mail or in-person at one of their service centers. Penalties and interest will continue to accrue until the balance is paid in full, but this option will keep the IRS from pursuing further collection options.
In addition to requesting an extension of time to pay the balance due, taxpayers may make an agreement with the IRS to make agreed payments over a set period of time. This type of arrangement is often referred to as an Installment Agreement. Many people believe there is only one kind of IRS Installment Agreement, but au contraire mon ami. Like ice cream, there are many varieties of installment agreements. Some of you reading this may be wondering why anyone would put “ice cream” and “IRS installment agreement” in the same sentence. Like the refreshment ice cream brings on a hot and oppressive day, having an installment agreement in place will sooth your anxiety-riddled senses and put you back into the driver’s seat of your own finances instead of the fear of uncertainty. Over the next several weeks, we will be discussing the various types of installment agreements available in upcoming blogs. So, start warming the fudge and grab the cherries. We have some ice cream sundaes to make!