Sam Brotman, JD, LLM, MBA September 30, 2013 3 min read

What if I Cannot Pay an IRS Balance Due?

In the tax world, to quote Benjamin Franklin, an ounce of prevention is worth a pound of cure. Almost all taxpayers can engage in some level of tax planning to their benefit prior to a return being filed. As a practitioner, I like to perform a mid-year check with my clients to review their current tax situations and to make sure they are on track with where we have identified they need to be. Although particularly helpful with self-employed individuals and those with small businesses, to ensure that they are making proper tax deposits, it can also be helpful for W2 employees who want to adjust their withholdings during the course of the year. In addition, I would recommend checking in with a tax professional to understand the tax consequences of any major life events. Getting married, having a child, changing jobs, getting a raise, buying a house, moving, caring for another individual, and a variety of other changes can all impact your future tax situation. It is always better to be able to be aware that you may have a balance due at the earliest possible juncture in order to try and minimize your liability.

If tax planning cannot mitigate the liability, usually it is best to file the return as soon as you can. The IRS imposes a failure to pay penalty, which is five percent (5%) per month of the tax that was owed from the date the return is due up to a twenty five percent (25%) maximum. As long as the return is filed by the due date or six months after, if a timely extension was filed, the taxpayer can avoid the penalty. While you will still be hit with failure to pay penalty, equivalent to twelve percent (12%) per year, in addition to interest at the statutory rate, these are unavoidable if the taxpayer cannot pay the balance due

Although filing a return may put the IRS on notice of the liability sooner, filing the return has two principal advantages. First, it starts the clock running on the three year IRS statute of limitation for audit and the ten-year statute of limitations for collections. Second, it prevents the IRS from filing a substitute for return (SFR) and gives the taxpayer the benefit of filing while the events of the past year are still fresh. This allows the taxpayer to be in a better position to remember potential credits and deductions, which the IRS will not give to the taxpayer if an SFR is filed. Ultimately, this usually results in less underlying tax being owed, which can make a big difference in IRS penalty and interest calculations.

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Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law

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