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Owing the IRS

Is there anything worse than owing the IRS? If you do, don’t fret; they have a collection process. (That’s bad sarcasm for a bad situation.) So what is a taxpayer to do when he owes back taxes?

For whatever reason you owe the IRS (e.g. increased salary with under-withholding of income tax, underpaying estimated tax payments, increased self-employment income, windfall on an investment or unexpected health issues to name a few) the IRS will be calling for payment. Of course, it’s better to address this problem early on, as the problem becomes costlier with time. The quickest way to stop this financial pain is to pay them off — easier said than done. For those who don’t have the resources to pay off the debt, you have some options.

The IRS will allow you to make payments until the debt is satisfied. You can apply for a payment agreement through the IRS online, by phone, by mail or in person at an IRS office. Options include full payment, payment over a short term (120 days or fewer), payment over a long term (an installment agreement, more than 120 days) or reduced or suspended payments.

ONLINE PAYMENT AGREEMENT

This is the electronic means to complete your online application and receive immediate notification whether the payment plan is approved. Setup fees apply, but they are cheaper when applying online. You can apply online if:

• Short-term plan: You owe less than $100,000 in combined tax, penalties and interest.

• Long-term plan: You owe $50,000 or less in combined tax, penalties and interest and filed all required returns.

Short-term payment plan

If you can pay your tax debt within 120 days, the short-term payment plan may be for you. It costs nothing to set up, but penalties and interest continue to accrue until the balance is paid in full. You can pay by check, money order or debit/credit card. Fees apply when paying by card.

Long-term payment plan

If you need longer than 120 days to pay off your tax debt, a monthly installment plan is what you need. Complete form 9465, installment agreement request, to ask for the arrangement. The maximum time allowed for installment plans is 72 months. File the form at any time to request an installment agreement. The best time to file it is with your balance due return.

There is a setup fee of $31 if you arrange for direct debit (automatic payment) and $149 if you plan to pay by check, money order or debit/credit card. A low-income individual may have his fee waived or reimbursed if he qualifies.

OTHER ARRANGEMENTS

Offer in compromise: This is a comprehensive plan, and if successful, the debt will be settled for less than the amount owed. The settlement amount will be based on your ability to pay. Your application package should be audit worthy to prove your inability to pay. With an acceptance rate of 40 percent, you will want to submit a thorough package. There is more time and cost involved with an offer in compromise.

Form 1127: If paying the tax at the time it’s due causes an excessive difficulty, you can file form 1127, application for extension of time for payment of tax due to undue hardship. You will have to state in detail your hardship, which must be more than an inconvenience. The form is due on or before the due date of the return (not including extensions). This extension can get you up to six months’ additional time. You may get more than six months if you are out of the country.

Currently not collectible: When the IRS determines that the costs and its ability to collect is more than the amount it will collect; it will suspend its collection action. If the unpaid balance equals or exceeds $10,000, the IRS will file a notice of federal tax lien.

BOTTOM LINE

No one wants to owe the IRS, but it happens. If you find yourself having to make monthly payments to the IRS, do not default on your agreement. A missed payment puts you in default, makes your debt due in full and starts the process over.

This information is intended to be helpful, but it does not replace professional tax advice.


Perkins is a CPA at Tina Perkins CPA, P.A., 4048 Popps Ferry Road, D’Iberville. Contact her at (228) 392-2991. Evaluations are done by appointment only.

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