Taxes aren’t exactly a fun part of life, and they certainly aren’t optional. If left unpaid, your tax bill can balloon and cause a huge financial headache, one you might not be able to easily dig your way out from.
If you don’t pay your taxes when you file, you’ll receive a bill for the unpaid balance. The unpaid balance is subject to interest as well as a monthly late payment penalty. But that doesn’t mean you shouldn’t file if you don’t have the money to pay all your taxes. The IRS also charges a failure-to-file fee that is equal to 5 percent of the unpaid balance per month, which can accrue to as much as 25 percent of unpaid tax. If you aren’t going to pay your whole bill at the time of filing, you should immediately get in touch with the IRS to figure out a plan.
Your tax bill has an expiration date, but it’s not short. The IRS has 10 years to collect taxes, penalties and interest from you.
How can you settle your IRS debt for less than you owe?
It’s not easy, but it is possible to pay less than you actually owe. The federal government considers an Offer in Compromisea last resort if you can’t pay what you owe in taxes. The qualifications are fairly murky, though. Generally, the IRS might let you pay less than you owe if they think that’s the most money they can expect to collect from you in a reasonable period of time. That time is likely the full 10 years they have to collect on the debt.
To find out if you qualify for an Offer in Compromise, you can fill out an online questionnaire. Filing all your relevant tax returns is one requirement to be considered.
If you are approved for an Offer in Compromise there are two ways to pay your settled tax bill: lump-sum cash and periodic payment. In a lump-sum cash settlement, you submit the initial payment of 20 percent of your total offer with the application. If the offer is accepted the remaining balance must be paid in five or fewer payments. In a periodic payment set up, you submit the initial payment with your application and continue to pay down the balance in monthly installments if the IRS accepts the offer.
How much should you offer in an IRS settlement?
Knowing what your settlement offer should be can be tricky and you might want to lean on an attorney or a service like Resolve during this process. The IRS’s form 433-A also offers guidance on an appropriate offer, meaning one you can not only afford but that the government will find acceptable for recouping their money.
Ultimately the government is looking for a number that to them equals the most money they could expect to get back in the 10 years they have to collect the taxes, penalties, and interest. But the amount also has to be something you can afford. The IRS takes into consideration your bills and monthly expenses when determining how much you can pay. They won’t just take your word for it — they’ll do their own calculations too once you’ve put in an offer. If you’ve made a lowball offer, you will have a chance to increase it if the IRS isn’t satisfied. If you don’t qualify for an Offer in Compromise, you can still ask to be put on an installment plan to pay off what you owe.
Installment plan or paying delay
If you owe the government $50,000 or less, you may qualify for an installment agreement. And you’re guaranteed for an installment agreement if you meet certain criteria, such as owing less than $10,000 and agreeing to pay off your taxes in full within three years. Otherwise, you may have up to six years to pay what you owe. Keep in mind, you’ll still have to pay interest on the unpaid taxes and late penalties until you pay off your debt in full. So it makes sense not to drag things out.
You might be able to avoid paying penalties (but not interest) altogether if you meet the requirements for either penalty relief due to reasonable cause or the first time penalty abatement policy. Some reasons you might qualify for relief due to reasonable causes include a serious illness, a fire or a natural disaster.
If you’ve hit on a temporary financial hardship and simply can’t afford to pay at the moment, the IRS can also delay collection on your account by marking it not collectible. This is a temporary delay until your financial condition improves. The debt does not go away.
Why Resolve
Navigating government forms and requirements can be tricky. An application for settling debt with the IRS can be thrown out simply on a technicality like incorrectly filling out a form or omitting something in your proposal. Working with experts can be helpful. While the Resolve platform doesn’t deal with tax debt specifically, we assess each debt situation on a case-by-case basis to help point out your best options. That means we can put you in touch with tax experts who can help.
