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Owing on Your Tax Return—What Should You Do If You Cannot Pay it Off?

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    Will you owe on your 2017 Income Tax Return?  If you know that you can’t pay what you owe by Tax Day, April 17, 2018, then it’s imperative to make sure to file your tax return anyways and work towards a resolution on the debt owed.

    The IRS assesses penalties for both failure to file AND failure to pay.  To reduce the overall liability, taxpayers should file their tax returns even if there is a balance due that they cannot afford to pay.  By doing so, the taxpayer avoids the failure to file penalty and only gets assessed the failure to pay penalty.  Avoiding these additional liabilities can save you hundreds, if not thousands, of dollars overtime.  In addition, avoiding the failure to file penalty will get you one step closer to minimizing the total amount you will eventually be charged by the IRS.

    After filing the 2017 tax return, there are various resolution options available when you cannot afford to pay the amount off in full.  If you cannot pay off the balance due on the tax return in full once it is filed, keep the following options in mind:

    1. Pay by credit card. The IRS will take payment via a credit card. In fact, they accept all major credits cards like American Express, Visa, Discover or Mastercard.  To make a payment, just visit the IRS website and choose the payment processor you would like to use.  You can make payments online or by phone.

    This resolution method is a good option for those taxpayers who know they can eventually pay off the debt in full.  If this is NOT possible, then a taxpayer should consider another resolution method to avoid creating more credit card debt.  Credit card interest and other fees can add up fairly quickly.  Thus, if a taxpayer is certain that they cannot pay off the entire liability and balance due at all in the near future, then it’s advised to consider other options and resolutions.

    1. Refinance your home. If you have sufficient equity in your home, using that equity to resolve your outstanding tax debt may be a solution to consider.  Taxpayer’s should keep in mind that this too may create additional debt.  If a taxpayer is already struggling to pay the existing mortgage or existing bills, then this is most probably not a good option.  However, unlike credit cards, you can deduct home mortgage interest as an itemized deduction.   It’s important to be fiscally responsible when considering this option.  This resolution option won’t be effective if a taxpayer cannot afford the mortgage payments and faces losing their home over a tax debt.
    2. Establish an IRS Installment Agreement. If a taxpayer cannot full pay the existing tax liability, then it’s important to consider negotiating an installment agreement with the IRS. This type of resolution allows a taxpayer to pay what is owed over time.

    In order to qualify for any type of payment plan with the IRS, a taxpayer must be in full compliance with all filings.  In addition, it’s important to note that full financial disclosure to the IRS may be required if the total debt owed to the IRS is over $50,000.  However, the IRS does offer streamlined processing of payment plans if the balance is less than $50,000.  This allows a taxpayer to avoid full financial disclosure and possibly avoid having to pay more than the minimum required amount.

    1. File an Offer in Compromise. An IRS Offer in Compromise (OIC) allows a taxpayer to settle IRS tax debt for less than the full amount owe The IRS has the authority to compromise any tax liability and will entertain an OIC based on a taxpayer’s ability to pay the debt back.  An application must be submitted along with certain filing fees for the IRS to begin reviewing an OIC.

    During the OIC process, the IRS goes through thorough financial analysis in order to determine if a taxpayer has the ability to pay off the liability in full.  The IRS considers a variety of factors including the ability to pay, a taxpayer’s income, expenses and equity in assets.  Generally, the IRS will accept an OIC if they determine that they cannot collect the amount due within the life of the ten-year statue.

    As with the installment agreement, you must be current with all filing and payment requirements.  All Offer in Compromise applications received on or after March 27, 2017 will be returned automatically if required tax returns are unfiled.  Any application fee included with the OIC will be returned along with the package and the initial deposit will be held as a payment towards the outstanding debt.

    A taxpayer may consider using the IRS’ Pre-Qualifier online tool to see if they would qualify for this federal program.

    1. Ask for additional time. Based on a taxpayer’s circumstances, a request for additional time to pay the debt off in full can be made to the IRS granted. This request can be made by calling the IRS directly.

    Every taxpayer’s financial situation is different.  However, if a taxpayer owes back taxes, it is highly important to take action and avoid ignoring the outstanding tax bills.  The IRS will not go away.  Congress has implemented more aggressive steps in collecting on outstanding tax debt.  The use of private debt collectors and seizing US passports from those who owe are just a few examples of these aggressive enforcement steps taken by the government to effectively collect on these tax liabilities.

    It makes the most sense to consult with a tax attorney who is well-versed in IRS collection issues and resolution before making any decisions on how to resolve tax liability.  For a detailed consultation with our aggressive team of CPAs, tax lawyers, and EAs, reach out to the Tax Law Office of David W. Klasing; call (800) 681-1295 or contact us online today.

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