Landmark Tax Group

Tax Tips

How to Deal With an IRS Bill You Can’t Pay in Full

Owing a debt you can’t pay is stressful, but it can be especially fraught when that debt is owed to the Internal Revenue Service. If you find yourself facing such a situation, know that there are options, but ignoring the debt and hoping it goes away is not one of them. Here’s how to deal with a tax bill you can’t pay in full.

Step 1: File your return

The IRS typically allows a five- or six-month extension of time to file a tax return, but that extension does not grant additional time to pay the tax due. An extension gives you more time to file, not to pay. You are obligated to calculate the amount owed and pay that by the original due date of the return, even if you’re not yet ready to file.

If you don’t pay 90% of the tax due by the deadline, the IRS charges a failure-to-pay penalty. That penalty is generally 0.5% per month on the unpaid balance, and it begins accruing the day after taxes are due. You’ll also be charged interest on any unpaid tax from the due date of the return until the balance is paid in full. Interest rates are determined quarterly based on the federal short-term rate plus 3%.

Simply put, file on time and pay as much as you can to reduce penalty and interest charges. After that, it’s time to consider payment arrangements.

Step 2: Consider payment arrangements

The IRS accepts payment via credit card, but be cautious about paying your tax debt with plastic. Not only do the companies that process payments charge fees ranging from 1.87% to 2.00% of the payment amount, but you’ll also be charged interest by your credit card company.

In most cases, interest rates from the IRS are far lower than those charged by a credit card. For instance, for the first quarter of 2017, the IRS interest rate for underpayments was just 4%. The average credit card interest rate as of March 2, 2017, was 16.53%. When you use a high-interest credit card to pay your tax bill, you’ll spend more of your money just keeping up with interest rather than paying down the balance.

Fortunately, the IRS is usually willing to work with taxpayers who need more time to pay their tax bill.

Short-term Extension to Pay

If you owe a relatively small amount that you can pay within 120 days, call the IRS to request a short-term extension of time to pay. This short-term extension is not a formal payment plan. The IRS just places a note on your account to indicate that you’ve been granted additional time to pay and they will not take collection action against you during this time.

Installment Agreement

If you need more than 120 days, you may be able to request an IRS installment agreement. With an installment agreement, you (or your Tax Representative) will work with the IRS to determine how much you will pay each month.

Partial Payment Installment Agreement

Occasionally, taxpayers owe so much that they cannot pay off the balance in a reasonable period of time. In those cases, they may be eligible for a partial payment installment agreement. Like a regular installment agreement, the taxpayer makes regular, agreed-upon payments for a set period of time. However, the payments do not pay off the entire debt. After the Collection Statute period ends, the remaining debt is forgiven.

Applying for a partial payment installment agreement is more complicated than applying for a regular installment agreement. Along with other considerations, the IRS calculates the monthly payment by taking into account the outstanding balance, the remaining statute of limitations for collecting the debt, and the reasonable collection potential.

Offer in Compromise

An offer-in-compromise (OIC), sometimes referred to as a “tax settlement,” is an agreement between the IRS and a taxpayer to settle a debt for less than the amount owed. Applying for an OIC is more complex than applying for an installment agreement.

To qualify, the taxpayer must prove that he or she is unable to pay off the entire debt through other means. It can be difficult to meet the income and asset guidelines needed to qualify, so this solution is best suited for people without many assets that can be liquidated to pay off your debt.

A licensed Tax Relief Professional can help you determine if an OIC is right for you, and if so, can help you apply for an OIC by preparing and submitting a properly packaged request along with all of the required documentation, including the newly increased OIC application fee of $186.

Tax Debt Discharge

There is a 10-year statute of limitations on IRS tax debt collection, so taxpayers with serious financial issues may find that their best option is to let that statute run out. One common method used to avoid collection activity during this time is get your tax debt into currently-not-collectible (CNC) status by demonstrating that you cannot pay both reasonable living expenses and your tax debt at the same time.

To grant CNC status, the IRS requires extensive financial information and supporting documentation. They may refuse to grant CNC status if they believe the taxpayer has assets that could be sold to pay the debt.

Any attempt to “run out the statute” should be done alongside a licensed tax relief professional, due to the many nuances of a particular tax case that need to be considered.

Step 3: Stay in touch

If you are on an installment agreement and your ability to pay the agreed upon amount changes, call the IRS immediately. Missed payments can result in the agreement going into default and resumption of IRS collection actions. However, if you contact the IRS before you miss a payment, they may be able to reduce your monthly payment amount to reflect your current financial situation.

Whatever your situation, never ignore a tax debt. If you do not communicate with the IRS, they can issue a Notice of Levy, which permits the legal seizure of your property. They may garnish your wages or seize bank accounts, real estate, or other property to satisfy the debt. The IRS can be difficult to deal with, but they are willing to coordinate payment plans under certain circumstances. The consequences of ignoring them, however, can be difficult to overcome.

If you owe back taxes and would like Landmark Tax Group to review your tax case for FREE, please contact us now for a free consultation.

Not only are we licensed Tax Relief Specialists, we are also former Senior IRS Agents who now serve the best interests of taxpayers like you – all we do is handle IRS Tax Relief matters, all day, every day. Speak to us for FREE at (949) 260-4770.

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