No one likes doing their taxes, and it is even worse when you are behind on tax payments. The dread of doing your taxes can lead you to put off filing altogether. But this can make matters worse as the fines and penalties can add up very quickly, and this could end up with the IRS seizing your bank account or other assets.
The good news is that this does not need to happen to you – even if you owe taxes. With that in mind, here are some strategies to help you get out from under a tax penalty.
Get a Payment Plan
The simplest way to get out from under a tax penalty is to set up a payment plan with the IRS. There are two types of plans you can choose from, a short-term option and a long-term option.
If you choose the short-term option, then you will need to be able to pay off your past-due taxes in 120-days or less. You can apply for this option either in-person, online, over the phone, or by mail, and there is no charge to set up a short-term repayment option. You can also use automatic withdrawals from your bank account or by scheduling charges to your credit card.
Short-term payment plans can be used for past-due tax amounts up to $100,000 in interest, penalties, and taxes. In many ways, this is the easiest way to pay off your tax bill, but you need to make sure you can pay the debt within the time window, or you might risk falling further behind.
Meanwhile, a long-term payment plan is one that will take more than 120-days to repay. Like the short-term plan, there are different options as to how you can apply. However, there might be a fee depending on the application option you chose and whether you mean the low-income requirement for having your fees waived.
Keep in mind that even if you set up a payment plan, the penalties and interest will continue to accrue until your balance reaches zero. As such, you will want to make sure that whatever plan you use, you will be able to meet the terms. If not, then you might want to pursue another method to get out from under your tax burden.
Make a Deal
While taxes are inevitable, the amount you owe might not be. That is right; you can play “let’s make a deal” with the IRS. In doing so, you will offer the tax authority a compromise. This is a settlement on your back taxes to have the IRS forgive the balance.
This is only an option when you can prove that repaying your tax bill will be an undue burden. As such, you might want to consider reaching out to tax relief services in your area to help you navigate the process.
Having the expertise of someone who deals with tax issues daily will be critical to have the IRS, or another tax authority, accept your compromise as it is usually harder to get the taxman to say yes to a compromise offer than it is to accept a payment plan.
While reaching a compromise might sound interesting, the truth is that the IRS accepts less than half of compromise requests. In fact, before making an offer, you will want to check if you qualify. This can include using a free tool offered by the IRS or talking to your tax relief expert.
Also, making a compromise offer is not free as there is a $205 application fee, and it is non-refundable. You will also need to make an initial payment, and this is also non-refundable. So, just because making a deal might seem attractive, it might not be the best option for most people.
Change Your Status
This can come in handy if you are legitimately in a situation where you cannot repay your taxes anytime soon. Under this option, the IRS will label your account “currently not collectible” given a delay in collection.
If you choose this option, you will need to turn in a Collection Information Statement as proof that your financial situation is as bad as you claim it to be. This will include information on your monthly income and expenses.
However, this option is not permanent, and it will not make your tax debt go away. Instead, it will initiate a process where you will need to apply for the deferment on an annual basis. Also, the IRS could seek to place a tax lien on you, and this could make buying a home or getting a car loan exceedingly tricky.
Getting out from under a tax penalty can be a daunting task. While the most straightforward option might be a set up a payment plan, this might not work for everyone. There is no one-size-fits-all approach. Instead, look at your options and talk with an experienced professional who can help you to navigate the process.
Veeramachineni Lalitha
I am Finance Content Writer. I write Personal Finance, banking, investment, and insurance related content for top clients including Kotak Mahindra Bank, Edelweiss, ICICI BANK and IDFC FIRST Bank. My experience details : Linkedin