If you are self-employed or set up your business in a flow-through entity, such as partnership, LLC, or S-corp, each year when we prepare your tax returns, we will also have prepared quarterly estimated tax vouchers. If you are employed, you would have had some of your pay withheld to cover for the income taxes.
This is a government requirement to prepay your taxes through withholding or estimated tax installments — and to adjust those prepayments if circumstances change during the year.
Nonetheless, there will always be occasions when you owe tax when we file your returns by the extended filing deadline of October 15. Moreover, some of you may not have the funds available to pay up when the tax bill comes due.
What Not To Do
You should not hold off on filing your returns until you can come up with the money to pay the tax due in full. If a return is not filed on time, you will be hit with failure to file penalties in addition to penalties and interest on the unpaid tax bill.
What To Do
1. Pay as much as you can, as soon as you can to minimize late payment penalties and interest — even if that means liquidating investments or borrowing money. While you may not like cashing out savings or borrowing to pay a tax bill, the interest charged on borrowings may be lower than the combined penalties and interest owed to the IRS on late payments.
2. In addition, you may want to consider borrowing from a 401(k) plan or life insurance, if available. While the interest payments are not tax-deductible, you are essentially borrowing from yourself since the payments on the loan replenish the account or life insurance value.
3. If you need time to cash in assets or arrange for a loan can apply for a short-term extension of 60 to 120 days. The IRS does not charge a fee for a short-term extension, but penalties and interest continue to accrue on the unpaid tax.
If the aforementioned options are not possible or available, below are more complex options the require you to deal directly with IRS.
I. Installment Payment Agreements
You can request an installment payment agreement from the IRS. Here again, interest and penalties continue to accrue until the tax is paid in full. In addition, the IRS charges a one-time user fee for setting up an installment agreement. Form 9465, Installment Agreement Request, is generally used to set up an installment agreement. However, if you have a balance due less than $50,000 can apply online for a payment agreement instead of filing Form 9465.
Generally, the fee for an installment agreement is $225, but the fee can be as low as $31 if the agreement is set up online and you agree to pay by direct debit from a bank account. The fee is $107 if the agreement is not set up online but payments are made by direct debit, or $149 if the agreement is set up online but payments are not made by direct debit. A reduced fee of $43 may apply for lower-income individuals, and the IRS may waive or reimburse the fee if certain conditions are met.
If the tax due plus penalties and interest is $50,000 or less, an individual you can arrange for a streamlined installment payment agreement. The maximum term for streamlined installment agreements is 72 months, and the minimum monthly payment is $25.
If the total amount due is greater than $25,000, but not more than $50,000, you must agree to a direct debit agreement to qualify without submitting a financial statement. If you do not agree to make the payments by direct debit, then you must complete Form 433- F, Collection Information Statement.
Streamlined agreements are available to small businesses with $25,000 or less in unpaid liabilities. These agreements give a business 24 months to pay by direct debit.
IRS generally will not take enforced collection actions, such as levying on your wages or bank accounts, when an installment agreement is being considered, while an agreement is in effect, for 30 days after a request is rejected, or during the period the IRS evaluates appeal of a rejected or terminated agreement.
II. Extension for Undue Hardship
Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship, can be filed to extend the time for paying tax. However, the IRS’s concept of hardship may not match yours. The form instructions make it clear that undue hardship means more than an inconvenience. You must show that you will have a substantial financial loss — such as selling property at a sacrifice price — if the tax is paid when due.
If granted, a hardship extension will generally not last for more than six months. Interest on the tax due will run until the tax is paid. Moreover, penalties may be imposed if the tax is not paid within the extension period.
III. Offers in Compromise
If you are struggling to make ends meet, you may qualify for an offer in compromise. An offer in compromise is an agreement between you and the IRS that settles your tax liabilities for less than the full amount owed. Absent special circumstances, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through an installment payment agreement discussed earlier.
In most cases, the IRS will not accept an offer in compromise unless the amount offered by you is equal to or greater than the “reasonable collection potential”.
The reasonable collection potential is how the IRS measures your ability to pay and includes the value that can be realized from your assets, such as real property, automobiles, bank accounts and other property.
The reasonable collection potential also includes anticipated future income, less certain amounts allowed for basic living expenses.
A streamlined offer in compromise program, involving fewer requests for financial information and greater flexibility in determining ability to pay, may be available for you with annual incomes up to $100,000 and tax liabilities of less than $50,000.
IF YOU WANT ADVICE ON THIS ARTICLE, GIVE US A CALL TO DISCUSS YOUR SITUATION ON 866-860-3880.