For many individuals, the tax season can be the most stressful time of the year. While many of us are simply anxious about filing our taxes on time and are impatient to get our tax refunds to celebrate or buy something nice, others might feel completely overwhelmed by the amount of paperwork required for filing and the amount of taxes that they owe. Belonging to the latter category is not only uncomfortable, but it could be outright frightening, especially if you have no idea what to expect and what to do next.
In the case of tax debt, just like with any complication in life, the more informed you are, the better choices you can make and the sooner you can get back on your feet again. With numerous online resources, many of which are free, you have an opportunity to get your tax debt under control and understand how to avoid problems in the future. The first step is to go over the fundamentals and consequences of owing taxes and what you should and can do in such a situation.
If you find yourself unable to pay your taxes in full come April 15, know that this is not the end of the world and that there are options available to you. Not filing or paying taxes to the IRS could have some serious consequences — ranging from penalties and wage garnishments to incarceration — however, the IRS tries to work with taxpayers to prevent such situations and offers various programs to help resolve tax debt and avoid additional charges.
Regardless of the amount you owe, it’s important to be proactive and communicate with the IRS in order to stay on good terms with the agency. Not doing anything about your tax debt is the worst course of action that could get you in trouble with the IRS.
Depending on your circumstances, you might qualify for a payment plan with the IRS. The factors that will determine the best plan for you are as follows:
Nowadays, the application process is quite straightforward as long as you have all the necessary documents. With certain types of agreements, you can even self-qualify, apply, and get immediate approval online through the Online Payment Agreement (OPA) application on the IRS website.
Before you apply for a payment agreement for the current year, you need to make sure that you filed all tax returns for previous years. In doing so, you can avoid penalties for not filing and getting deeper into debt.
Next, you should go over your current tax return and verify the amount you owe, including any penalties and interest. Everyone makes mistakes, and the IRS is not an exception. That’s why it is always a good idea to read through all your documents thoroughly and double-check all the numbers. If something doesn’t add up or doesn’t make sense, get in touch with the IRS immediately and ask for clarifications or proper adjustments. Consider having a tax specialist help you with this step.
Seek the advice of a tax attorney or CPA if you owe $10,000 or more, as your tax return will be more complex.
When you are ready to file your payment agreement application, you will need to have certain information available, so make sure to gather everything ahead of time. Collect all records of your earnings and expenses, such as bank and credit card statements, assets and liability documents, and pay stubs. In addition, you will also need to prepare some personal records for the three months before the tax due date. What specific documents you need for your application will depend on the type of payment plan you are applying for. Check the IRS website for a complete list of required documents.
When you apply online, make sure to have the following items ready:
There are some options available when it comes to IRS payment agreements. Your eligibility will be determined by the total amount you owe in taxes, whether you owe individual or business taxes, and your particular circumstances. Each plan comes with its own terms, conditions, and fees. Typically, the more you owe, the harder it is to qualify and the stricter the terms are.
If the amount of your tax debt is relatively low and you can pay it off rather quickly, most likely you will qualify for a short-term payment plan. A short-term payment agreement, also called an extension, will give you up to 120 days to repay your tax debt of $10,000 or less. This plan is free of charge. However, you are still responsible for incurred penalties and interest. Although this plan has no mandatory minimum monthly payment, it is best to pay as much as you can manage to avoid interest accrual.
To apply for the short-term payment agreement, you must file your application online or fill out and submit Form 4868, Application for Automatic Extension of Time to File, by mail.
If your debt amount is moderate and/or you are unable to settle your tax debt within four months, you might consider the following option. An individual installment agreement is for individuals who owe under $50,000 and need more than 120 days for repayment. Under this plan, you will decide yourself on the monthly payment amount and will set automatic payments to be deducted from your checking account, payroll, credit card, or an Online Payment Agreement Application.
With a streamlined installment plan, you will get up to 72 months to pay your tax debt. Unless you negotiate another monthly payment amount, your default minimum payment will be your total balance divided by 72.
Whatever plan you sign up for, keep in mind that the IRS regulations require collecting any debt within 10 years. For debts between $25,000 and $50,000, you’ll need to provide income and expenses paperwork to the IRS to get enrolled. You may file your application either online or fill out and submit Form 9465, Installment Agreement Request, by mail.
Depending on how you make payments and whether you set up an online account or not, your fees will differ. As of November 2018, the fees for an installment agreement are as follows:
Owing substantial amounts of taxes to the IRS makes the debt situation a lot more complicated and requires some serious effort to resolve it. High-debt installment agreements for tax debt greater than $50,000 are more complex in their setup and cannot be filed online. You will also need to provide the IRS with additional financial documents, including statements of credit accounts, assets, monthly earnings, and living expenses.
Typically, it is hard to qualify for an installment agreement when you owe more than $50,000 in taxes. However, you should still consider this option if you can’t pay your taxes in full on the due date. Along with your application, you will have to thoroughly explain your situation to the IRS and support your case with any relevant documents. To apply for a high-debt installment agreement, file Form 433-F, Collection Information Statement. The fees for high-debt installment plans are the same as for individual installment agreements.
You might consider this payment plan if you accrued tax debt during the course of your business operation. Small business agreements are for small-business owners with business tax debt under $25,000. Although you may easily apply for this agreement online, the forms, the application process, and the agreement terms are slightly different than for individual installment plans. In addition, you will have to file an In-Business Trust Fund Express Installment Agreement (IBTF-IA). Typically, you will have 24 months to pay your tax debt. For debt amounts between $10,000 and $25,000, you will need to enroll in a direct debit installment agreement and pay $31.
The undue hardship extension plan is for those instances when making payments under any of the above plans is extremely difficult. Essentially, to qualify for this plan, you will have to show the IRS that paying taxes in full and on time will cause you or your family to suffer some harsh financial consequences. An example of undue hardship would be the need to sell your house at a loss to repay your taxes, or inability to maintain even the minimal standard of living after paying taxes.
To qualify for the undue hardship extension plan, you will need to prove the case of undue hardship and provide the IRS with detailed statements of assets and liabilities, such as student or auto loans and retirement accounts. In addition, you must include an itemized list of income and expenses for the three months prior to your tax due date.
Once you are approved, your late payment fees will be pardoned and you will get an extension from six to 18 months. To apply for undue hardship, file Form 1127, Application for Extension of Time of Payment of Tax Due to Undue Hardship.
If none of the above plans work for your situation, you might consider an offer in compromise. In essence, you will need to negotiate with the IRS and ask them to reduce your balance in exchange for paying the remainder in full. To verify your eligibility, the IRS will conduct a thorough investigation of your life. You need to be ready to provide information about your credit lines, assets and liabilities, and monthly earnings and expenses.
This last-resort option is only granted if you prove to the IRS that you will experience economic hardship from paying your tax debt in full, or if your tax debt is more than your income and assets. Generally, you will be advised to explore all other options before applying for an offer in compromise. If the IRS determines that you can repay your debt with an installment agreement or an extension, your application will be rejected. If you believe that you meet eligibility criteria for an offer in compromise, file Form 656, Offer in Compromise, along with the application fee of $186.
Although your initial reaction to the news about tax debt might be denial and a desire to deal with it later, you need to face the situation right away. The quicker you can react, the more options you will have available to you and the better the outcome will be. Even if you feel overwhelmed with your tax debt and can’t image how will you ever pay it off, remember that the IRS offers plenty of payment options to accommodate a wide range of individual and business scenarios. Make sure to explore all the possibilities and carefully evaluate each of them.
Hopefully, this overview of the IRS payment agreements gave you a better understanding and confidence in dealing with tax debt. For more information on different tax debt relief programs, contact our experts at Solvable. Our debt specialists will help you work out the best solution for managing your tax debt and educate you on effective strategies for a debt-free life. With access to our debt management tools and resources, you will have an easier time staying on track and navigating the world of finances.