If you’ve started your taxes and think you might owe the IRS more than you can afford to pay this year or owe back taxes from previous years, you may be able to get help to pay off your tax debt. The IRS is one of the strictest creditors and has far more power than a typical collection agency, but its main goal is to collect revenue. If you are willing to work with the IRS, the IRS will almost always work with you as long as you have and will act in good faith along the way.
Payment plans allow you to pay off your taxes over time. They do come with above average interest rates and late payment penalties may apply as well. However, late payment penalties may be reduced if you set up automatic payments and you avoid tax liens and other collection actions.
For small tax debts related to the current year, you are often automatically eligible for a payment plan as long as you haven’t recently used one and are able to pay within a short amount of time. Plans for larger amounts require IRS approval based on your income or assets. Payment plans for amounts over $25,000 require that you work with a tax professional to complete the process.
Adjusting Previous Returns
One possible source of coming up with additional funds to pay your tax bill is by examining your returns from the last few years. Uncommon deductions, such as work moving expenses, medical expenses, and mileage for charity work are often missed. If you find that you failed to take certain deductions in previous years and overpaid your taxes, you can credit this amount towards your tax bill as long as the deadline for filing an amended return hasn’t passed.
Penalty and Interest Rate Reduction
Many people fear the IRS because of its broad powers to charge additional fees, garnish wages, and place liens on properties. However, the truth is that the IRS only applies the harshest penalties to those who intentionally cheat it. Many fees are automatically reduced or avoided by doing things like filing your tax return even if you can’t pay, setting up automatic payments, or otherwise showing your making an effort to pay your taxes. Further reductions are discretionary based on whether the IRS believes you acted in good faith and had a legitimate hardship (and weren’t just financially irresponsible).
Offers in Compromise
An offer in compromise is a settlement of your tax debt for less than you actually owe. They are not easy to obtain because the IRS expects to be paid in full and considers paying taxes a priority over everything but essential living expenses. However, if you can convince the IRS that you can’t reasonably be expected to have the full amount owed within the near future, don’t have assets to sell, and don’t have discretionary expenses to cut, you may be able to receive one.
Offers in compromise and other tax settlements can be arranged directly with the IRS. However, especially with large amounts, a tax professional can help you complete the application properly and make sure you pay the lowest amount possible.