How to Prepare For an IRS Tax Bill You Can’t Pay

Usually surprises are a great thing, and make people happy.  Tax bills on the other hand, aren’t so lovely especially when you are in a position that prohibits your ability to pay the bill that’s due.  Tax season rolls around every year, but even though people know taxes are coming, it’s not uncommon to have no idea what taxes might be owed and what amount is coming your way. 

How can you prepare for shocking tax bill that you may not be able to afford?  Our friends over at thetaxadviser.com gave some great ideas to try and help minimize the discomfort of having to relay such unwelcome news.

No matter which situation it might be, you are going to need help coming up with a viable solution for those tax liabilities that can’t be paid immediately.  There are a few possibilities to help you navigate this situation, because the IRS has already had to deal with non-compliance issues and have put several options in place for this very sort of thing. 

Free Start Initiative

The IRS wants to help people who owe taxes to become compliant so they offered the Fresh Start Initiative in 2008 and 2009.  The program was so popular (or so many people were falling behind on their taxes) that in 2012 they did a major expansion of the program to offer even more solutions for those who were struggling to pay their taxes.  Below are some of the options available and what it might mean for your client.

Taxpayers can often file an extension to get their taxed filed, but there isn’t an extension of time granted for the taxes that are due.  So if you are unable to pay the full amount owed by the due date you are going to be subject to late-payment penalties and interest due for each month they are late.  If the IRS doesn’t get the returns and taxes that are due on time, the IRS can impose a tax levy or file a Notice of Federal Tax Lien (or both) so it makes sense to set up a payment plan with the IRS to make sure their taxes are being paid on time so that their credit or ability to apply for credit isn’t affected by the tax lien or levy’s.  The IRS will charge interest on the amount that is due and they will use any future tax refunds to pay down the amount owed, but it’s a much better option than the alternative of being in default with the IRS.

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Payment Plan

You will be able to apply on the IRS.gov website for an extension.  You’ll want to establish payment plan eligibility for your client.  Which in most cases is anyone who:

  • Is an individual who owes less than $100,000 in combined penalties, interest, and taxes who wants a short-term payment plan and has filed all previous tax returns
  • Is an individual who owes less than $50,000 in combined penalties, interest, and taxes who wants a long-term payments plan and has filed all previous tax returns
  • Businesses that owe $25,000 or less in combined penalties, interest and taxes and who also want to seek a long-term payment plan can usually qualify if they have filed all previous tax returns. If it’s a short term payment plan of 120 days or less, then user fees won’t be charged or apply.  If it’s a longer payment plan then user fees will be charged. 
  • Balances over $25,000 for an individual or over $10,000 for a business must be paid by a direct debit
  • If you do not qualify for an online application, you are permitted to mail in a completed Form 9465, which is also known as an “installment agreement request” along with a “collection information statement Form 433-F. In some cases you can reduce the amount of money that you owe the government by qualifying for an offer-in-compromise program.

Offer in Compromise

The offers in compromise program allow taxpayers to make a settlement with the government for less than the full amount they owe.  These are allowed in some cases where making the payment would create a financial hardship for the taxpayer or in cases where they are unable to pay the full amount of the taxes owed.  There are several initial requirements that must be met before a taxpayer is eligible to request an offer in compromise.  They are:

  • Taxpayer must not be able to pay the taxes through an installment plan or in full and not be able to pay through equity in assets
  • Must not have outstanding innocent spouse claims or any open audits
  • Must not be involved in open and ongoing bankruptcy proceedings
  • If a business owner with employees, must make all required federal tax deposits for the current year
  • Must make all current year required estimated tax payments
  • Must get a bill for at least one debt that is included in the offer
  • Must file all tax returns that are legally required

If you are planning to try and get an offer in compromise, you can submit the request using a couple of forms.  You can either use an Offer in compromise Form 656.  It will need to be submitted with a separate form 656 for business and individual tax debt.  You can also use a Form 433-A (OIC), which is a collection information statement for wage earners and self-employed individuals.  Or, you can also use a Collection information statement for businesses, Form 433-B (OIC).  They need to be submitted with a nonrefundable initial payment and an application fee of $186.

Whenever possible, it’s always good advice to avoid surprises.  Always remember to consult with a trusted tax adviser when their financial situation changes.  Be aware of the various options that do exist to try and help you navigate your situation when they owe money to the IRS.  Also remember to having regular tax planning sessions or check-ins and help them estimate your taxes that may become due.  If you will do some advanced planning, often times things can be done before hand to help them avoid debts to the IRS like increasing withheld taxes, or setting aside a larger amount of money for estimated taxes that will be due when they file their return. 

Contact us for more info about tax bills for clients. 

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Fulton Abraham Sanchez, CPA

Fulton Abraham Sánchez, CPA I am Certified Public Accountant, specialized in Tax Planning & Offshore Strategies for Real Estate, Hedge/Equity Funds, Fintech, Crypto, Expats, IRS Debt Resolution. You can email me fa@fascpaconsultants.com and follow us on Facebook : FAS CPA & Consultants.

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