Another deadline has come and gone. Perhaps many out there have not yet filed their income tax return because you know you have a substantial balance due to the IRS and you just can’t pay it right now. Maybe you have that one project or deal that you are waiting on to come through so that you will have the cash to take care of some outstanding obligations. So what do you do if you can’t pay your income taxes?
Let me start by encouraging you to put the IRS on your payment priority list. Credit card companies present perhaps the only industry that will hit you with worse penalties and interest for late payment than the IRS. We have seen plenty of companies and individuals come to us with overwhelming IRS debt which began as several years of small underpayments that have snowballed with interest and penalties. And out of all your creditors, the IRS is the one that can reach into your bank accounts, garnish your wages, put liens on your assets and business, and make your life completely miserable.
You want to avoid all that, but you can’t pay. Now what?
If you think you can pay the balance within 120 days, send what you can with your return and then call 1-800-829-1040 to request to pay the balance in full within 120 days. This way you may be able to avoid penalties. If you don’t want to call the number, you can go to irs.gov and click “I Need To…” in the upper right hand corner, then click “Set up a payment plan”.
If you can’t pay it within 120 days, you will need to do a payment plan. Pay what you can, and file your return with Form 9465 attached to the front. You can also apply online the same way you would if you could pay within 120 days. The cost for a monthly installment agreement is $105 unless you do it through electronic payments, in which case it is $52. Depending on your circumstances, you may be able to get a reduced charge for the monthly installment agreement.
If you have access to low interest financing, you may want to consider taking out a loan to pay off your balance due. The IRS charges adjustable interest rates of about 5% per month, plus late payment penalties of up to 1% per month even if you are on a payment plan. The IRS website suggests that even if you took out a loan with 13% annual interest to pay your tax debt, you may still save money over a payment plan depending on your situation.
In a worse case scenario, you can file an Offer in Compromise. Don’t be fooled by the TV ads, this is not a magic solution for people to relieve themselves of small IRS debts so that they can save thousands of dollars and go buy a boat. The Offer in Compromise process is long and intrusive. The IRS will calculate exactly how much you owe and what they think you can pay before the statute of limitations expires for each year. If you have cash left over each month after paying the most basic necessities, assets that could be sold to cover old tax debts, or expenses that you could cut out of your family budget, your best bet is either going with a payment plan or getting a low interest loan and paying of the IRS balance.
One of the worst financial decisions you could make is to ignore your IRS debt and hope they don’t notice.