It’s a scary thing when you can’t pay your taxes. It’s one thing to miss a credit card payment, but failing to pay the federal government taxes that you owe has potentially significant consequences, including interest and penalties. Fortunately, there are some steps you can take when you can’t pay your taxes.
In fact, the IRS provides excellent guidance for those struggling to pay Uncle Sam. With tax time just around the corner, we thought it was a good time to review what you should do if you are having trouble paying your taxes.
File Your Tax Returns
The very first thing to understand is that you should file your tax returns on time, even if you can’t pay the taxes. Failing to file your tax returns on time can result in additional penalties over and above what you may pay for failing to pay your taxes. If you need assistance preparing your returns, either seek out the help of a tax professional or use one of several tax software packages. But the key is to file your returns on time, even if you can’t pay all of the taxes you owe.
Pay as Much as You Can
Even if you can’t pay the entire amount, it’s best to pay as much of your tax bill as you can. Paying even a part of what you owe will reduce the amount of interest and penalties you may have to pay.
Payment Plans and Installment Agreements
For those who cannot pay their tax bill in full, the IRS does allow taxpayers to set up a payment plan. If you owe $25,000 or less in taxes, you can apply for a payment plan online directly with the IRS. If you owe more than $25,000, you must complete a Collection Information Statement, Form 433F (pdf).
Before you seek a payment plan, consider the following:
- You will be charged a one time user fee of $105.00, for direct debit agreements, the fee will be $52.00.
- Interest is charged on any tax not paid by its due date.
- You will be charged a late payment penalty unless you can show reasonable cause for not paying the tax by the due date (April 15, 2010) for individual income tax returns Penalty will be charged until it reaches 25% of the original balance due and interest will be charged until the account is fully paid.
IRS Offer in Compromise (OIC)
An Offer in Compromise is an agreement with the IRS to settle your tax debt for less than you owe. From the IRS website:
In most cases, the IRS will not accept an offer unless the amount offered by the taxpayer is equal to or greater than the reasonable collection potential (the RCP). The RCP is how the IRS measures the taxpayer’s ability to pay. The RCP includes the value that can be realized from the taxpayer’s assets, such as real property, automobiles, bank accounts, and other property. In addition to property, the RCP also includes anticipated future income, less certain amounts allowed for basic living expenses.
Offers in Compromise are not as easy to obtain as a payment plan. But the key here is to recognize that you have viable options when you can’t pay your taxes.Topics: Taxes