Every year thousands of working Americans pay numerous bills and then realize they have little left to pay what they owe in taxes. Owing the IRS can be scary because if taxes go unpaid and unresolved you can potentially face some of the harshest collection mechanisms. Many taxpayers avoid the IRS because they cannot pay and are scared of what may happen when the IRS finds out they can’t pay. Understand that the IRS allows individuals to resolve their taxes that they cannot pay in various ways, no matter how bad their financial situation is. Before considering a tax payment plan or some other form of tax settlement is a smart idea to double check and make sure you have taken all possible deductions that you could have taken. If you have not done so already, you should have a tax professional take a look at your return to see if there is anything you missed. Every year there are new tax credits that become available that the average taxpayer is not aware of. It is also a good idea to check past tax returns as well. You will still be able to claim a refund up to 3 years from your filing deadline or 2 years from your last tax payment. So if you have missed deductions in the past you can file an amended tax return to offset what you owe this year.
Once you realize that you cannot pay your taxes at all or in full it is important to act quickly (be proactive) to find the best resolution. The IRS handles similar situations everyday and they are fairly accommodating to taxpayers that are unable to pay but yet communicative. When it comes to picking the right method you first have to analyze your present financial situation and anticipated future financial situation to determine which method is best for you. The IRS will not allow you to use a method that your financial standing is “too good for.” So it is important to be honest with yourself. Below are 5 solutions to not being able to pay your taxes and a description of when that solution should be used.
1. IRS Installment Agreement: An installment agreement is the most common way for individuals to resolve their taxes that they cannot pay. An installment agreement allows taxpayers to pay back taxes over a series of monthly payments (36-60 months). When you setup an installment agreement it is almost like having a loan that you have to pay back. The great thing about it is that the interest rate you receive can be less than you would receive if you used a credit card or obtained another type of loan outside of the IRS. Like any other loan, the longer you take to pay it off, the more you will end up paying in interest. Typically this method is best when a taxpayer has a financial situation that permits a monthly tax payment what at the same time leaving enough for necessary living expenses.
2. Part Pay Installment Agreement: A part pay installment agreement is available to individuals that cannot afford to make the required monthly payments on a regular installment agreement (discussed above). The IRS offers this payment alternative to those individuals that would not be left with enough funds to pay their normal living expenses with a regular Installment Agreement. The IRS has certain guidelines they follow as to what expenses are considered “necessary.” They will not take the initiative to see if your income is below these requirements, you must prove it to them.
3. Hardship Status: Hardship status is when you get temporarily declared “Uncollectible” by the IRS. When this happens the IRS does not take collection actions against you until your financial situation improves in the future. Being declared “Uncollectible” does not resolve your taxes owed but it does buy you time to resolve your financial problems. In order to be placed under hardship status you will be required to show the IRS that you cannot pay your taxes. If you remain under hardship status for a long enough period the taxes owed can expire when the statute of limitations is reached on these debts (typically 10 years).
4. Offer in Compromise (OIC): This is a way for taxpayers to resolve tax liabilities for less than the amount owed. This type of resolution will be accepted by the IRS if it is in the best interest’s of both the IRS and the taxpayer to promote future compliance with all tax payments and filings. The IRS mainly only accepts OICs if they feel that they may never be able to collect the total amount of taxes owed and the offer that is made is greater than or equivalent to what they believe they would be able to collect. The IRS makes sure that only qualified individuals receive this form of relief. This is a highly sought after form of tax relief but it is rarely granted (10-12% approved). This method can be right for you if you do not have the money to currently pay your taxes and you do not expect to have the money in the future. It can also be a good if you may have the money now but that money needs to be used for necessities and you don’t expect to have stable income in the near future.
5. Family and Friends: Having family and friends help you is the last method you should consider. It is always an excellent idea to keep family and friends out of your financial issues, especially tax issues. There are only a few instances where this maybe be considered an OK idea. It can be an OK idea to have family or friends help if you know you will receive some money in the near future and that money can be used to pay back your family or friend right away. If you are not 100% sure of being able to pay them back quickly, it is a better idea to go with one of the other methods listed above.
If you are unable to pay your taxes owed the most important thing you can do is act quickly to find a solution. The IRS actually does have great resolution methods and they try their best to make methods that fit each person no matter what their financial and personal situation looks like. If you are unsure of what the best resolution for your situation you can either call the number on the bill you received from the IRS, call the taxpayers advocacy hotline, or reach out to a tax professional such as a tax attorney, enrolled agent, or a CPA to receive unbiased help with your tax problems.
The above is a guest post from Manuel Davis. Manuel is a tax accountant and writer who has been helps individual taxpayers with various IRS back taxes related problems.