At the beginning of the year, many people start to file their income taxes with the IRS. This can be a daunting task, regardless of one’s income. Trying to understand the tax laws and filing the appropriate forms can be extremely complicated.
Filing your taxes on time is also important. But what do you do when you owe money? What if you don’t have the money to pay? Here are some helpful tips to get your taxes filed on time, and some possible solutions to cover unpaid taxes.
Request an Extension
The IRS is generally agreeable to granting extensions to allow people to pay the taxes they owe. It is easy to apply for extensions, because you can apply by phone, by completing the online application, or by authorizing your licensed tax preparer to request it for you.
Extensions last for 120 days, so be prepared to pay the full amount by the end of that period. If you cannot afford the full amount now, or in 120 days, you should find other alternatives.
Set Up an Installment Agreement
An installment agreement comes in two types, short term and long term. A short-term installment agreement allows you to pay your entire tax debt in multiple payments. However, you must pay the entire balance within 120 days. A long-term installment agreement allows you to pay your entire tax debt in monthly installments over a longer period. This is probably the easiest arrangement because it lessens the monthly amount to something more affordable. There are set up fees though, and you are still responsible for any penalties and interest accrued.
Offer in Compromise
If your tax debt is so large that you may never be able to pay it, you may qualify for an Offer in Compromise. If you honestly cannot afford to pay your debt, make a proposal to the IRS detailing what amount you can afford without causing you further hardship or debt. There have been cases where the offer has been as low as $1, though this is the extreme.
The IRS will evaluate your offer based on your income, assets, and living expenses. If the IRS determines that the amount you offered is equal to or greater than the amount you owe, the agency will accept your offer and collect your payments before the statute of limitations expires on your tax debt.
You have two payment options once your offer is accepted. Your first option is a lump sum agreement, although you are only required to pay 20% up front, and the remaining balance in five or fewer payments.Â Your second option is periodic payments. You make the first payment up front, and the rest in monthly installments until the debt is paid. Regardless of which option you choose, there are fees involved. Be wary about applying if you are only in short-term distress, and/or your assets and income potential are not poor.
If you are worried you cannot pay your tax debt, options exist to help you, so don’t ignore filing. Do some research on your situation, talk to a tax professional if you can, and come up with a viable plan to satisfy the IRS.