The Internal Revenue Service (IRS) reports that millions of Americans fall behind on their tax obligations. According to recent data, as of 2020 taxpayers currently owe the feds over $114 billion in back taxes, penalties and interest payments.
So, what’s a taxpayer to do when they find themselves facing an unmanageable tax bill? Thankfully there are options. For some, a loan may make sense. If interest rates are low, the cost of the loan may be less than the interest that is added to your tax bill. If this is not an option, other options from the IRS that can help make this bill more manageable include online payment plans, delayed collections, and offers in compromise.
Option #1: Online payment plans
A payment plan allows taxpayers to meet their tax obligation over an extended period of time. The IRS offers two types of online payments plans: a short-term and long-term. The short-term plan generally involves a 180-day repayment period or less and is available for taxpayers who owe the IRS less than $100,000.
The long-term plan, also known as an installment agreement, is available for those who owe less than $50,000. Those who file their tax returns on time can receive a reduced penalty rate while taking part in this long-term payment plan. The penalty rate is generally 1%, but those who qualify may pay a reduced rate of 0.25% per month.
There is a streamlined option available for taxpayers who owe up to $250,000. In most cases, the IRS will also allow actual expenses if the taxpayer pays in full within five years.
Although sometimes reduced, interest and late-penalty fees generally continue to accrue during the repayment period, so although a bit more time to make payments can give you some much needed breathing room it is still best to repay the bill as quickly as possible.
Option #2: Delayed collections
The IRS may consider an account not collectible and delay their collection efforts. This is only available in situations where the IRS deems the taxpayer is unable to pay any of the tax bill. This does not address the debt; it just puts it on hold. The IRS will not forget about the bill or forgive the tax debt, they just give you a break before continuing their collection efforts.
Approval generally involves completion of a Collection Information Statement and proof of financial status. Even though the IRS recognizes the taxpayer cannot pay this bill, they will continue to charge penalties and interest on the tax debt. As such, the overall tax bill will continue to grow.
Option #3: Offers in compromise
As the name implies, this option allows the taxpayer to offer the IRS an amount less than the owed bill. In exchange for the offered amount, the IRS would then forgive the remaining tax bill — an agreed upon compromise between the taxpayer and the IRS.
To qualify, there must generally be some doubt as to the liability or amount of the tax bill, doubt as to whether the taxpayer could ever pay the tax bill, or an acknowledgement that requiring full payment would create economic hardship or is unfair and inequitable due to exceptional circumstances.
Option #4: Penalty relief
It is important to point out that a failure or additional delay in paying a tax bill can result in an increase to the owed amount. This is because the IRS can add additional interest and penalties when taxpayers do not pay the bill by the due date. This bonus option applies specifically to these late-filing or late-payment penalties. In some cases, the IRS will review the reason for the delay and, if they find the cause reasonable, forgive or reduce the penalty. This is done on a case-by-case basis. Examples of reasonable cause in past cases have included a failure to pay due to fire or other natural disaster as well as death or serious illness.
An attorney experienced in tax law can review your situation and help you decide which option is best.