Do You Owe Back Taxes to the IRS?

If you think you owe back taxes to the IRS as the April 15 deadline looms, do your best to file your return. At the very least, request a six-month extension. The next step is to assess the various strategies for paying the IRS what you owe.

Pay What You Can When You File

The IRS is used to taxpayers not being able to pay all of their taxes when they file. The agency does recommend you file on time and pay what you can with your return. That way, you accrue fewer interest and penalty charges. At the very least, you should request a six-month extension. The extension is for filing, not for paying back taxes.

Request an Extension or Get One Automatically

A six-month extension is automatic if you make a tax payment with IRS payment options and specify that the payment is for an extension. The payment options include Direct Pay, the Electronic Federal Tax Payment System (EFTPS), debit card, and credit card. If you are serving in a combat zone or qualified hazardous duty area or living outside the United States, special rules sometimes apply.

The extension gives you until October 15 or the next business day after October 15 to file. Ideally, you would be able to get the funds for your entire tax liability during this six-month window. Of course, that is not always possible.

Explore Long-Term and Short-Term Payment Plans

You can request installment agreements, or payment plans. They let you pay your tax debt in chunks over time for up to 72 months (six years). If you owe more than $50,000, expect to submit a financial statement with your request. Any future refunds go to this tax debt until it is fully satisfied. You do have to pay an application fee, but low-income taxpayers can submit a form for a lower fee.

One advantage of making a request: The IRS typically is not allowed to levy or collect taxes from you while the request is pending. Now, if your request is rejected, collections remain suspended for 30 more days. The same idea applies if the IRS agrees to installments but you fall behind on the payments. If the IRS moves to stop the agreement, collections are suspended for 30 days. You can appeal rejections or terminations, and collections are automatically suspended while the appeal winds out.

You can also try for partial pay installment agreements. They are good if you cannot pay your tax owed in full over six years but can pay some of it. You'll have to submit documentation of your income, assets (or lack thereof), expenses, and liabilities, and must owe more than $10,000 to the IRS.

Consider an Offer in Compromise (OIC)

As the IRS explains, an offer in compromise enables you to pay less tax than what you owe. It is available if you are unable to pay your full tax debt or if doing so would lead to financial hardship. The IRS considers the particulars of your situation, especially your ability to pay and your income, expenses, and assets. For instance, if you have a serious illness affecting your ability to pay, the IRS could consider that. The Tax Help Network offers free consultations and other tax debt services if you’re interested in seeing whether OIC might fit your situation.

Advantages of OICs include these: The IRS pauses other collection activities, and you do not have to make payments on any existing installment agreements. You do have to follow through on the payments you outlined in your OIC request. The IRS has two years to accept the offer or not. If the two-year period expires, the offer acceptance is automatic.

Do be aware that the IRS could file a Notice of Federal Tax Lien. It alerts creditors that the IRS is making a claim on your assets. The notice could end up in your credit report.

Look Into Currently Not Collectible Status

You may simply have no way of paying anything while still being able to afford daily living expenses. Currently not collectible (CNC) status lets you defer payments until you are better off financially. If you are unemployed, CNC could be a good option.

The IRS needs to see documentation that you are unable to pay. You will probably have to submit your average monthly income and your basic, required living expenses. The IRS would prefer an installment agreement over CNC, so it reviews the documents to see if installments would be feasible.

The agency could also ask to see bank deposits, pay stubs, and receipts from your living expenses. Now, suppose you have a car, and your monthly payment is $1,000. It's possible the IRS could deem that amount (or whatever amount) too high and say that your car payment should be $500 a month. The agency can do this with multiple expenses.

As you might have expected, the IRS keeps any future tax refunds of yours until that tax debt is paid off. Your tax debt also increases because of penalties and interest.

If you owe more than $10,000, expect the agency to file a federal tax lien. The agency reviews your situation yearly, and if it changes, may move you from CNC status to some form of active payment. After 10 years of being in CNC, though, the IRS will probably forego the taxes, penalties, and interest. However, if you left the country, requested OIC or made certain other moves, that could restart the timeframe for the 10-year collection statute of limitations.

Face the Issue —  Do Not Avoid Filing Back Taxes or Finding a Strategy of Some Sort

It can be easy to feel overwhelmed, dazed, helpless, or any number of adjectives, and put off filing. However, if you do that (or if you at least do not file for an extension), you risk much heftier fees, penalties, and interest down the road. The IRS tends to catch up with people eventually, whether they have filed or not. It is much better if you file, admit you have problems paying back taxes, and explore your options.

One approach is to reach out to the Tax Help Network for a free consultation. We can help with back taxes, installment agreements, IRS tax negotiation, offers in compromise, and much more.