Tax time is often filled with anxiety. But what if you’re looking at a big tax bill and you just don’t have the cash?
Learning you owe more than you have can result in paralysis — but it’s critical to take action. If you ignore the problem, the Internal Revenue Service will start with nasty notes, but eventually can garnish your wages and go after your property. “The IRS is very quick to file a lien, and you can lose your home if a lien is filed against you,” says Mark Luscombe, a tax attorney and federal analyst with tax publisher CCH. Since a tax lien shows up on your credit report, it could cause you to lose your job, especially if you work for the government or in finance.
“File your tax return on time — no matter what,” advises Michael Rozbruch, an Encino, Calif., CPA and head of Tax Resolution Services, a negotiation and mediation firm. Send in a check for $10, he advises. This protects you from the 25 percent failure-to-pay fine, and since it shows you made an effort to pay on what you owe, it may facilitate negotiations with the IRS later.
If you don’t have the money now, but think you can scrape it together soon, you can request an extension. This requires completing a relatively simple online form – or paying a small fee to your tax preparer complete on for you – and sending it in by the April 18 deadline. Most taxpayers can get an automatic six-month extension “The law recently changed and now you don’t even need a reason to file an extension,” says Melissa Labant, CPA, a tax expert on staff with the American Institute of CPAs.
But don’t assume that filing an extension absolves you of responsibility to pay. Any late payments are subject to interest charges (currently at 4 percent) and may be subject to late payment penalties. Those terms might be more attractive than credit card debt, a home equity loan, or borrowing from a friend or family member, but there other alternatives.
If you’ve got a good reason for needing more time to pay — say your home was wrecked by a tornado or were diagnosed with a serious illness and lost your job —you call the IRS (800-829-1040) and speak to a representative at who may be able to extend the payment deadline by up to 120 days.
And most people who can’t pay their bills in full can set up an installment agreement online in a matter of minutes, according to the IRS. If you owe less than $25,000 in combined taxes, penalties and fees, there you can fill out Online Payment Agreement with the IRS. Or you can file a Request for Installment Agreement, Form 9465 along with your return. When applying for monthly payment schedule, you’ll suggest a payment plan and may need to provide some financial information to back it up. It takes about a month to learn if the IRS will accept your plan. Keep in mind that an IRS payment plan might not be the way to go if you are at risk of missing a payment, in which case a lien or levy could be enacted.
If your bill is larger than $25,000, the process gets trickier. For these sums, it is best to seek out the help of an accountant to negotiate a payment plan. Likewise if you legitimately feel that the IRS is chasing you for taxes you do not owe, or have an extreme and dire situation which prevents you from paying, seek counsel with a local CPA or tax attorney, including those through a legal aid service to help reduce the amount you owe. But exercise caution before considering a tax settlement service that promises to resolve your tax debt for “pennies on the dollar.” Some of these companies recently faced lawsuits by attorney generals in several states, as well as FTC scrutiny for their questionable practices. “Get a referral from someone you trust, and go with someone local who has a community reputation to maintain,” Luscombe says.
The IRS recently expanded its Offer in Compromise program, which now covers taxpayers with annual incomes of up to $100,000, and tax liabilities up to $50,000. This program may settle a taxpayer’s liabilities for less than the full amount owed. In most cases, however, the IRS says it will not accept these agreements if it believes a taxpayer can ultimately pay the full amount through a monthly payment agreement. And although there are some exceptions, the IRS generally will not accept less than what it considers a “reasonable collection potential.”
While paying up can be painful, dealing with the IRS isn’t always as bad as it sounds. In 2007, Scott Mitchell decided a payment plan was the way to go when he realized he owed $20,000 in payroll taxes for a web site business. He knew the bill was accurate, but “that amount was completely insurmountable,” says the Portland, Ore., resident who was 24 at the time. He called the IRS, honestly explained that he had been ignorant about his tax obligations, and set up a plan to pay $600 per month. “I expected the IRS to be completely uncompromising, but I was pleasantly surprised,” Mitchell says. “There is a more human side to the IRS than I thought existed.”
Go to the TFT’s Tax Season Countdown for more 2010 tax coverage.