Approximately 75% of Americans who file federal income tax returns receive refunds. But what if you didn’t give Uncle Sam that tax-free loan by over-withholding from your paycheck last year? What if you under-withheld and owe income taxes? You can take several steps to minimize or eliminate problems from owing income taxes.
First, file an income tax return, even if you will owe income taxes that you cannot pay. Failing to file can result in heavy “failure-to-file” penalties (from 5% - 25% of the balance owed per month), so file, no matter what else may happen.
Secondly, if you cannot file by the April 15th deadline, request an automatic 6-month extension to October 15, 2014 by completing and filing IRS Form 4868, which you can find with instructions here: IRS Form 4868. The IRS allows filing by snail mail or e-filing.
Third, try to at least partially pay by April 15th. Whether you file by April 15th or receive a filing extension to October 15th, income taxes are still due on April 15th and any unpaid taxes are subject to penalties of 0.5% plus interest per month; consequently, paying some or all of the debt by April 15th will spare you some additional debt.
Fourth, if you are unable to pay in full with your own funds and owe $300.00 or less, pay with a credit card or small personal loan, the idea being that you can pay the IRS quickly and with little or no interest by briefly using $300.00 from another source.
Fifth, if you are unable to pay in full with your own funds and owe $300 - $1,000, obtain a small loan, ideally from a friend/relative or credit union that will charge you little or no interest. Here, we anticipate that it will take a longer time for you to repay the loan source but you will still handle the IRS quickly while paying minimal interest on the loan.
Sixth, if you owe more than $1,000, apply for an IRS installment payment agreement by filing form 9465, found here: http://www.irs.gov/Individuals/Online-Payment-Agreement-Application This type of agreement has several requirements and can be accepted or rejected by the IRS. In order to be eligible for this payment agreement, you can owe up to $50,000.00 (including the taxes, penalties and interest) and you must have filed all the required tax returns. If you are eligible for this agreement, the IRS will work with you through installments and extensions.
Seventh, while it is hard to say exactly when you might want to consult/retain an attorney who specializes in Tax Law, if you simply cannot pay the taxes, penalties and interest owed, you may wish to consult/retain such a lawyer at this juncture. Your lawyer will know the most recent laws and procedures to assist you in resolving your IRS problems.
Eighth, with or without a lawyer’s assistance, if you simply cannot pay the taxes, penalties and interest owed, you can make an Offer in Compromise. The idea underlying an Offer in Compromise is that the IRS would rather be paid some than none, so the IRS might accept a partial payment in full satisfaction of your debt. The Offer in Compromise forms are best accessed in the IRS packet here: http://www.irs.gov/pub/irs-pdf/f656b.pdf Your offer must be submitted with a $186.00 nonrefundable fee and an initial payment of the debt UNLESS you meet the Low Income Certification Guidelines, determined in that same packet of IRS forms. If your income is above that “Low Income” classification, you must make an offer for either a lump sum cash payment or periodic payments. If you offer the lump sum cash payment, you must send an initial payment of 20% of that offer along with your application and, if your offer is accepted, pay the balance in 5 or fewer payments. If you offer periodic payments, you must submit your first periodic payment with your application and, if your offer is accepted, keep making monthly payments until the debt is paid in full. If you meet the Low Income Certification Guidelines, you do not need to pay the application fee or send any initial payment with your Offer or make any payments while the IRS considers your offer. Acceptance of your Offer in Compromise is not guaranteed and even if it is accepted: you must: file all the required tax returns and make all the required payments; any tax refunds in the same calendar year that your offer was accepted will be applied to your debt; and any federal tax liens stay in effect until you have paid the entire agreed debt.
Ninth, if the IRS rejects your Offer in Compromise, you can appeal within 30 days by Form 13711, found here: http://www.irs.gov/pub/irs-pdf/f13711.pdf
Tenth, if you simply cannot pay and/or cannot resolve the problem with the IRS and/or are about to get slammed by the IRS, use the government’s Taxpayer Advocate Service, with multiple methods of accessing your own Taxpayer Advocate here: http://www.taxpayeradvocate.irs.gov/ If you owe money to the IRS, you are not alone, and the idea behind these steps is to resolve this problem and eliminate the related stress from your life once and for all.
DO’S AND DON’TS
DON’T be intimidated by the process or the people.
DO file your tax return on time, if at all possible.
DO request an automatic 6-month extension for filing your tax return by completing and filing IRS Form 4868: IRS Form 4868.
DO try to at least partially pay your debt by April 15th.
DO use a credit card or small personal loan to pay a debt of $300.00 or less.
DO use a small loan to pay a debt of $300.00 - $1,000.00.
DO apply for an IRS installment payment agreement by filing form 9465, found here: http://www.irs.gov/Individuals/Online-Payment-Agreement-Application if you owe $1,000.00 - $50,000.00, including debt, penalties and interest.
DO consult/retain an attorney who specializes in Tax Law.
DO make an Offer in Compromise with this packet: http://www.irs.gov/pub/irs-pdf/f656b.pdf
DO appeal rejection of your Offer in Compromise within 30 days by Form 13711, found here: http://www.irs.gov/pub/irs-pdf/f13711.pdf
DO use the government’s Taxpayer Advocate Service, found here: http://www.taxpayeradvocate.irs.gov/
[Note from HandelontheLaw.com: This article is to be used as an educational guide only and should not be interpreted as a legal consultation. Readers of this article are advised to seek an attorney if a legal consultation is needed. Laws may vary by state and are subject to change, thus the accuracy of this information cannot be guaranteed. Readers act on this information solely at their own risk. Neither HandelontheLaw.com, or any of its affiliates, shall have any liability stemming from this article.]
Note from HandelontheLaw.com: This article is to be used as an educational guide only and should not be interpreted as a legal consultation. Readers of this article are advised to seek an attorney if a legal consultation is needed. Laws may vary by state and are subject to change, thus the accuracy of this information can not be guaranteed. Readers act on this information solely at their own risk. Neither the author, handelonthelaw.com, or any of its affiliates shall have any liability stemming from this article.