In an ideal world, everyone would be able to pay their taxes in full and on time, but sometimes it just isn’t possible. If difficult circumstances mean that you are coming up short during a tax season, it is probably the source of a lot of stress and anxiety.
The instinct to avoid the issue may be strong, but it can cause your problems to multiply exponentially. Interest, penalties, and other severe consequences can begin to build up. The most important thing for anyone struggling with their taxes to know is:
Put simply, an installment agreement is a payment plan which allows you to pay what you owe over time, in smaller payments. Depending on how much you owe, you may be able to get on an installment plan just by asking. Being proactive with the IRS can save you a lot of trouble down the line.
If you have a balance due, you will receive a notice or letter from the IRS stating the amount owed and requesting you to take action by a certain date. Responding within the listed time frame is important because it can:
Even if you know you won’t be able to pay your taxes, make sure to file. The sooner you file, the better. You must be current on filing your tax returns up to the current year before you can request an installment agreement or other relief from the IRS.
In addition, failure to file fees are steep and continue to accrue until your return is filed, which can make your situation worse.
Aside from the possible late filing fee, there are penalty fees for late payment. They are charged at ½ of 1% of your unpaid tax balance. The penalty will apply for each month or part of a month after the due date and starts accruing the day after the tax-filing due date.
It may be possible to avoid paying penalty fees if you can prove that you have a reasonable cause for filing and/or paying late. The exact criteria for reasonable cause are generally determined on a case by case basis. Serious illness, death of a close family member, unavoidable absences, and disasters may all qualify.
If you fail to pay your tax liability in a timely manner, the IRS may issue a Federal Tax Lien. The IRS will issue a public document called a Notice of Federal Tax Lien, which lets creditors know that the government has a right to your property.
A lien is a very serious consequence which can have devastating effects on your reputation and your business. You may have problems accessing credit, and the IRS could seize your property. Avoiding a tax lien should be your first priority.
The IRS Fresh Start Program was designed to make it easier for individuals and small businesses to pay back their tax debts and avoid federal tax liens. You can read the full details on the IRS website, but in short, The Fresh Start initiative:
You have four basic options when it comes to paying your tax debt:
Understanding how IRS installment agreements work will help you decide if they are the right option for you and your business. Here is what you should know.
Under the Fresh Start Initiative, if you owe less than $50,000 total in back taxes, penalties, and fees you should qualify for a 72-month Installment agreement without needing to undergo an in-depth financial disclosure. The IRS may request some financial information, but generally installment agreements of this type are approved easily.
If you owe more than $50,000 total in back taxes, penalties, and fees, or if you will need more than 72 months to clear your balance, you will need to submit a detailed financial statement with your application. Depending on the contents of this statement, you may be required to sell some assets to pay some or all of your liability.
You may have some control over your minimum monthly payment. The IRS will ask you how much you think you can pay each month. The more you can afford to pay off each month, the less you will ultimately end up paying in penalties and interests, but you do not want to stretch so far that you put yourself at risk of defaulting.
It is generally wise to keep the minimum payment low but make periodic large payments whenever possible.
You have choices about how to pay your installments. When you set up your installment agreement you will be asked to choose a payment option.
Payroll DeductionThe minimum monthly amount will be automatically withheld from your paycheck.
Defaulting on the installment agreement is never a good idea. Default will open you up to a serious enforced collection actions. The IRS may file a Notice of Levy on salary, income, bank accounts, or property, and you could lose your assets, business, or even your home.
If you think you may be unable to keep up your minimum monthly payments, you must get in touch with the IRS. They may be able to help, and good communication can fend off collection action as you work together to find a solution.
Staying on top of your taxes is the best way to save yourself the strain of late payments. You should check your withholding amount regularly: the IRS has a useful calculator to help you estimate how much you (or your employer) should be setting aside each month for taxes.
If you are self-employed, have multiple jobs, or are in an otherwise complex income situation, you should consider a tax optimization consultation to establish a reasonable withholding rate so that you will not face a nasty surprise next tax season.
If you receive a nasty notice in the mail from the IRS, the first thing that you will probably want to do is to call your CPA. Your CPA will help you figure it all out, right?
Wrong. In many tax matters the first thing you should actually do is call an experienced tax attorney like the ones who work at Brotman Law. Tax attorneys know how to advise and defend their clients from the IRS. Hiring one could save you many sleepless nights and a lot of money.
At Brotman Law, our tax experts can build a tax action plan that can deal with your tax debt today, and avoid future tax debts tomorrow.
"Sam is a wonderful, results-oriented and extremely knowledgeable and talented attorney, who really has 'heart' in working on behalf of his clients, and explains options in a straightforward, respectful manner. He has assisted us with great outcomes which have added to our quality of life. I would not hesitate to recommend Sam for his services as he is an ethical, personable and expert attorney in his field. You will likely not be disappointed with Sam's work ethic, approach and his efforts."
-Aileen Dwight, Licensed Clinical Social Worker & Psychotherapist
Last updated: June 3, 2023
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