I’m pretty sure we all know that paying your taxes is not really an option. If you don’t pay them, many annoying and bad things could happen, and no one likes dealing with the IRS more than necessary. Some people think the IRS won’t notice if they don’t pay taxes, but let me reassure you that they will find out eventually and you most likely won’t get away with it. However, sometimes paying your taxes may become difficult if you are going through a hardship or got a little in over your head.
When you don’t pay your taxes . . .
If you don’t pay your taxes, you will probably receive notice after notice from the IRS until you deal with the issue. Remember that interest and penalties stack up over time so the amount you finally pay will be much higher than if you paid your tax bill on time. Interest on your amount due can compound daily, and penalties are added to your bill on a monthly basis. You may potentially be able to get your penalties waived, but the IRS will not waive interest. If you wait too long to pay your bill, your penalties and interest may end up being higher than your original tax liability!
The time limit for the IRS to collect taxes from you is 10 years. You might think, “Oh good, well I just won’t pay my taxes and then time will run out!”. Bad idea. This can cause many financial hardships for you. One major thing that can happen is the tax debt you owe is reported on your credit report as an outstanding debt which could hurt your credit score the longer it goes unpaid. This could cause you to have problems applying for credit cards, buying cars, buying a home, etc. Additionally, the IRS can put a lien on your personal property, most commonly your home. This means that if you decide to sell your home, the IRS will get paid the amounts they are owed before you see any of the proceeds. Having a lien put on your home could also mean that you cannot sell your home until you pay off the debt, or it could keep you from getting home mortgage loans in the future. The 10 year period is not an end all, be all however.
The period of collection can last longer than 10 years for a variety of reasons. One reason is if you voluntarily approve for the time period to extend beyond 10 years. You may be thinking “why would anyone ever agree to that?” Well, if you apply for an installment agreement or an offer in compromise, you may be required to waive the 10 year limit in order to be approved. Additionally, any time that collection is suspended, the 10 year period extends further out for that amount of time. For instance, if you file for bankruptcy, the IRS often cannot collect from you during that time. This means that the 10 year period will extend for the amount of time of your bankruptcy case, plus 6 months. Also, the time that your installment agreement request or offer in compromise request is being reviewed could also cause your 10 year period to be extended for the amount of time of that review process.
If you file your tax in a future year and are due a refund, that refund could also be taken by the IRS to satisfy a portion of your prior tax liability. Additionally, other payments you receive could be seized by the IRS after you have been properly notified such as your social security payments. At the drastic end of the spectrum, you could go to jail if the IRS determines that you have been purposefully trying to evade paying your taxes.
If you can’t pay your taxes . . .
One option taxpayers have if they can’t pay their balance is full is an installment agreement. In order to qualify for an online installment agreement, you must have filed all required tax returns. Your tax bill must be below $50,000 if you are filing an individual return, and this includes any penalties and interest applied to your return. Businesses must owe $25,000 or less in payroll taxes. If you don’t qualify for an online installment agreement, you can fill out and mail in Form 9465 (Installment Agreement Request) and the Collection Information Statement.
Another option is to apply for an Offer in Compromise. Many places offer these as a solution in advertisements to help you clear your IRS debt. However, the IRS does not simply hand out Offers in Compromise. The qualifications are very specific. There are three instances in which the IRS accepts an Offer in Compromise request. The first is if you and the IRS have a legitimate dispute regarding the amount of tax due. Obviously most people think they pay too much in taxes, but in order to qualify for this reason, the dispute must be genuine. Another reason you can apply for an Offer in Compromise is if there is serious doubt about whether or not the tax liability is collectible. This happens when your assets and income are drastically lower than the tax owed, and you must be able to prove this. The last reason is if the tax owed is correct and could be paid, but forcing the person to pay it would be unfair and create an economic hardship. This is only for very special circumstances. To make sure you qualify, you can fill out the Offer in Compromise survey. You must pay a $186 fee when you apply for an Offer in Compromise unless there is doubt regarding the tax owed (the first option discussed) or if your monthly income is lower than 250% of the poverty guidelines. This fee is nonrefundable.
Under the Offer in Compromise, there are two payment options. You can pay in a lump sum which means you pay in five or fewer installments over five or fewer months. If you choose this option, 20% of the tax liability is due with the application and is not refunded to you even if you are denied. It is simply applied to your tax due. The other option is a periodic payment offer which is due in six or more monthly installments within a 24 month period. With this plan, you must pay the firs installment with your application, and it is also nonrefundable.
Obviously the best option would be to plan correctly throughout the year and have enough saved to cover your tax bill. You can continuously check your potential tax due based on income throughout the year to that date using calculators on the IRS website. It may not be 100% accurate, but it will give you an idea of what you will owe. April 15th is quickly approaching so be sure to get your taxes done on time, or file and extension if you haven’t already!