What to do if you owe the IRS money


Tax Day is finally here once again. If you get a refund, you’re in luck. But if you owe the government money, you may be worried that you will have to pay the amount owed by the April 15 filing deadline, even though you’ve requested an extension.

Due to the IRS – especially when you don’t have the funds to pay – can cause significant stress. But before you let anxiety get the best of you, know this: The Internal Revenue Service, believe it or not, gets it. In addition, you can benefit from a collection alternative to pay off your debt gradually or at a greatly reduced amount.

Most taxpayers, especially those who may have a harder time paying an unexpected tax debt, are generally unaware that these options exist. As a result, they may end up sending the government more money than they can afford to pay, as I have learned in my work at Georgia State’s. Philip C. Cook Clinic for Low Income Taxpayers.

This impending problem creates a stressful situation that could be alleviated or minimized with a simple phone call.

Unable to pay

Every year, millions of taxpayers receive IRS notices reflecting balances they are unable to pay. This represents Billions dollars owed to the federal government.

The IRS takes collections seriously, so it is important that taxpayers make arrangements with the IRS for their tax debts. Failure to answer them may result in loss of salary and account Specimens, property privileges and even the denial of a passport.

The IRS created three collection processes to help taxpayers so that no adverse collection action (such as a levy) occurs: a “disbursement agreement”, “currently uncollectible” status and an “offer in compromise”.

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Installment agreement

Payment agreements are commonly referred to as payment plans, which allow a taxpayer to pay off debt in smaller, more manageable payments. These payments are usually the same amount each month for a designated period of time, which will settle the debt in full.

The advantage is that it allows you to make small payments on the overall debt, and the IRS generally cannot take on additional collection activity against you (other than applying future repayments to the outstanding debt) .

The downside is that penalties and interest continue to accumulate on the outstanding balance. As a result, the debt is repaid more slowly than the taxpayer might expect.

A typical scenario would involve the IRS asking the taxpayer how much they can afford to pay. If that amount satisfies liability in less than 72 months and before the 10-year limitation period for collections expires, the IRS will usually approve the suggested amount.

This collection alternative can be requested by completing Form 9465, Request for Payment Agreement, or by calling IRS Automated Collection Service. Form 9465 can accompany a completed return (filed April 15) that reflects taxes owed or it can be submitted separately. It can also cover several years or tax periods. A one-time setup fee will be charged when the installment agreement is approved. This fee is reduced for low income taxpayers and for taxpayers who wish to set up a levy agreement.

While you are in an installment agreement, it is important to remember to pay at least the agreed upon payment amount by the due date each month. It is also important to file your income tax return each year before the filing deadline, even if you cannot pay the entire balance owing on the return, and to pay the entire balance when possible.

Currently not collectable

Sometimes a taxpayer’s required monthly expenses such as food, shelter / utilities, transportation, and health care exceed the taxpayer’s monthly income. When this happens, paying the IRS would cause the taxpayer in financial hardship.

In such situations, the taxpayer can request that the IRS suspend collection of a tax debt. This protective coding is known as the “currently uncollectable” status. This is advantageous because the taxpayer is not required to make any payment. Another advantage is that the IRS will not take the taxpayer’s income or accounts.

As with the installment agreement, a downside to this option is that interest and penalties continue to accrue. Because this is temporary, the IRS can lift the status in the event the taxpayer’s financial situation changes and the IRS deems they can pay.

The IRS will regularly monitor the taxpayer’s information. If the taxpayer’s income increases to the extent that the IRS believes that making payments is an option, he or she will be put back into active collection status.

The IRS has four main categories of eligible expenses that are capped based on national and regional trends. These and other expenses are deducted from any income earned by the taxpayer to determine financial hardship:

  1. food, clothing and other items

  2. housing and utilities

  3. transport

  4. dependent health care costs.

The currently non-collectable status can be requested by sending a completed mail Form 433-F, Collection Information Statement, or by calling the IRS once the return has been processed and you receive an invoice. Typically, the IRS will want you to file all returns for the previous year before placing yourself in CNC status.

Offer in compromise

The offer in compromise The program helps taxpayers renegotiate their tax debt by examining their cash and non-cash assets, monthly disposable income, and future income to determine how much they can expect to collect.

Once a number is agreed upon, the taxpayer can choose to pay the amount in 24 months or less. The advantage of this alternative is that the remainder of the tax debt is waived, and once the negotiated conditions are met, any liens that may have been deposited on your property are released within 30 days.

The downsides include meeting certain compliance requirements for five years after acceptance, such as filing all required returns and paying any taxes due by the filing deadline each year, and forfeiting any refunds. for a period of time. For some taxpayers, these inconveniences will far outweigh the fresh start created by eliminating excess tax debt.

The offer in compromise (in case of doubt as to collectability) can be requested by completing Form 656-B. The offer must be accompanied by documents – on income received, expenses paid and debts owed on non-monetary assets such as real estate and vehicles – showing that the taxpayer is unable to pay the total balance owed . An application fee and an upfront payment must also be included in the completed offer, unless your income is below 250% of the poverty line.

Take action

So whether you ignored IRS notices regarding taxes owed on previous returns, or expected to have to write a check when filing last year’s return, now is the time to take action.

The IRS may have a reputation for being difficult to manage, but as I noted above, it can be quite understanding when individuals are open and forthright about their financial situation and their willingness to pay what they want. can.

The worst thing you can do is not respond. Contact the agency or your local clinic for low-income taxpayers – there is at least one in most states. Take advantage of any of these alternatives and work on fixing the problem.

You will do better in the long run.

This is an updated version of an article originally published on April 15, 2016.

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