November 5, 2022 | Tax Help
If you know you won’t be able to afford to pay the income taxes you owe in full for this year, you might be starting to panic as tax season approaches and realize that you need tax resolution services. As we all know, failing to pay taxes can result in significant fines as well as potential criminal charges, so it’s smart to get a plan in place. The good news is that there are options available for people in your situation to allow for payments over time and reducing the penalties charged.
I Can’t afford to pay my taxes in full?These options are available to help you when you can’t afford your tax bill. They include:
1. Apply for an installment payment agreement. If you already know you won’t be able to pay what you owe, you can request a payment agreement before you receive a bill from the IRS. You can make the request on the IRS’s website or by submitting an IRS Form 9465 with your tax return.
When a taxpayer cannot pay the IRS a lump sum payoff for their tax debt, they need to create a payment plan with the IRS or NYS. This is known as an Installment Agreement. There are a number of options to consider when the payment plan is established. Obviously, it is almost always best to create the lowest monthly payment plan amount as possible and then pay more to get the balance down quickly, but not be at risk of defaulting the payment plan if money is tight. Therefore, there a number of factors to consider getting the correct balance of paying down the debt quickly, and not having a future issue of a defaulted payment plan. As with other payment plans that you might establish with a creditor, the amount you will pay will depend on the amount you owe, the amount you can afford to pay, and what assets and income you have. The payment plans are within the discretion of the IRS and NYS, which means they decide the amount per month they will accept. Often it takes a lot of hard work to get the IRS & NYS to agree on an affordable number. The IRS & NYS Tax Department does not give much flexibility with the monthly payment being late once the payment plan is established. In some rare instances, the payments can fluctuate if the person or business has seasonal income, or income on a non-recurring basis, such a lawyer who gets paid on contingency basis.
There are three common ways that you can make payments under the IRS Installment Agreement payment plan.
The first is through a payroll deduction. This method needs to have your employer take from your pay the correct amount and send it to the IRS. It sounds straightforward, but sometimes the employer does not want to become involved or your pay cycle is not monthly, and it becomes awkward for the employer to pay the exact right amount each month since the number of payroll cycles in a given month can fluctuate.
The second, and maybe the best method, is using a monthly direct debit electronic transfer from your bank. This payment method, once it is established, takes little energy to make sure the payments are made (other than keeping money in the account), so it is my favorite for most clients.
The last method is to just mail in checks to the IRS or use EFTPS payment system. Typically, when you choose this method the payments needs to be made at least 10 days before the due date to enable the payment to be received by the IRS by the due date. The IRS sometimes sends monthly reminder letters, so that helps you stay compliant with the payment plan so you do not miss a payment and have a federal tax lien issue.
It is always important to understand that the true cost of the tax debt will continue to grow with interest and penalties until is paid off. In some cases, we can assist with a first-time penalty relief. Therefore, it’s important to pay the debt off as quickly as possible while still creating a payment plan that is affordable and not overly stressful to maintain. Also keep in mind that your tax refunds will be used to pay down the tax debt.
2. Ask for additional time to pay. If you just need more time to acquire the money you owe, you may want to ask the IRS or NYS Tax Department for an extension of time to pay. They generally allow at least a few months. If you qualify, you can have the late payment penalty waived as part of the request.
3. If short term issue, consider applying for a loan or putting the taxes on a credit card. While this might not sound like a very appealing option, it is better than not paying and then ending up in trouble with the IRS and facing fines for late payment. Obviously, proceed with caution with this idea to see if it makes sense.
4. Consider an Offer in Compromise. While this might sound like a very appealing option, if you are unable to pay if full, making a partial payment to resolve the issue can be a great outcome if you are eligible, but being eligible is very difficult.
Forms to file an IRS Offer in Compromise (OIC)
To fill your OIC application form, you can find it on the official website of the IRS (irs.gov). You will find an Offer in Compromise Booklet, Form 656-B. You will have to read that form carefully as the IRS includes all the instructions about the application form and the process of submitting an OIC offer to the IRS.
The forms and fees required are:
- Form 433 A (for individuals) (with all required documents)
- Form 433 B (for businesses) (with all required documents)
- Form 656(s) (for both individuals and Corporation/ LLC/ Partnership and must be submitted separately)
- A non-refundable application fee of $205
- A non-refundable initial payment for each Form 656 (as needed)
For paying the application fee and initial payment for the form 656, you will get certain payment options that are Lump Sum Cash and Periodic Payment plans. You can choose any of these two payment methods as per your financial ability. Typically, the quicker you can pay the better the discount.
5. At the very least, pay what you can afford. Filing a tax return on time and paying what you can afford to pay will eliminate the late filing penalty, reduce the late payment penalty and cut down the interest charges.
Work with an attorney who can help in your exact situation. An experienced tax attorney can help you find a solution with the IRS and NYS. Working with the IRS can be intimidating and confusing, but a having an attorney on your side can make all of the difference.