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What to Do If You Owe the IRS a Lot of Money

Benjamin Franklin once said that nothing’s certain in this world except for death and taxes, and it’s true. Governments may have provided assistance to individuals severely affected by the ongoing COVID-19 pandemic, but taxes still need to be collected to fund federal coffers.

Despite these challenging times, taxpayers are not exempt from paying. There is some tax relief available as long as you know where and how to look, but there’s no real escape from paying your taxes.

If you have an outstanding tax debt, you can seek advice and assistance from the Internal Revenue Services (IRS) or third-party tax professionals. Additionally, here are some suggestions on what to do if you owe the IRS a hefty amount and can’t pay in full:

1. File your tax return

Even if you can’t pay your taxes, you should still file your tax return to avoid penalties. The agency charges a minimum of 5% of the total amount you owe for each month that your return is late, and this may increase to 15% if the failure to file is caused by fraud. The failure to file penalty increases to 100% of the taxes you owe or $435—whichever is less—if you fail to file your return for 60 days or more. On the other hand, underpayment of taxes carries an interest rate of 6% as of May 2019. Besides, you cannot apply for tax relief if you haven’t filed your return on time.  

Review your return before submitting it to the IRS. Don’t just rely on tax preparation software, as these can’t monitor human error or remind you to input tax deductibles. 

2. Consult a tax expert

Third-party experts, such as lawyers, accountants, and nonprofit organizations are tax experts who can help you with your liabilities. Low-income tax centers are set up in various points, and provide legal assistance to taxpayers who have previous tax debts or have outstanding dispute with the IRS. Manned by volunteers from nonprofit organizations and academic institutions, these centers are partly-funded by IRS and supervised by the Taxpayer Advocate Service (TAS).  Also called the Office of the Taxpayer Advocate, TAS can help represent you in your legal squabble with the IRS.

Aside from a tax expert, you may also seek help from a debt relief network, which is typically made up of firms that can help you manage your tax debts or other financial liabilities.

3. Apply for an installment agreement with the IRS

Depending on your situation, the total amount owed, and how soon you can pay, the IRS may agree to set up an installment agreement with you.

Individuals, independent contractors, and sole proprietors may apply for long term tax payment plans of more than 120 days if they owe less than $50,000. For short-term payment plans of 120 days or less, the taxpayer should owe the agency less than $100,000.   

Businesses who have filed all required returns may avail of this program, too, but only if they owe the government less than $25,000 in taxes, including penalties, and interest.

If a taxpayer needs more than 72 months to pay and has payables of over $50,000, the IRS will request a Collection Information Statement containing a thorough examination of assets, income and expenses to come up with an amount that you can pay regularly.

Interested taxpayers must request the agreement by phone or by mailing Form 9465 to an IRS service center.

4. Avail of the Currently-Not-Collectible Program

Taxpayers who cannot pay their taxes can request for a temporary suspension of collection activity through the Currently-Not-Collectible (CNC) program. You’ll have to show the IRS your financial statement showing that your expenses outweigh your income, and that you don’t have assets that can pay your debt in full.

You don’t need to pay your taxes for a year or so, or until your financial status improves but the interest and penalties continue to accrue. So, you still have to pay eventually, as the IRS will review your situation and may oblige you to pay if you’ve become financially capable.

5. Submit an Offer in Compromise

This may be a shot in the dark, but it’s worth taking, nonetheless.  If you can’t afford to pay your taxes in full, submit an Offer in Compromise, which allows you to pay only a certain percentage of what you owe. Before approval, the IRS will assess your ability to pay, your income amount, expenses, and asset equity.

Unlike the CNC program, once the IRS approves your Offer in Compromise application, you only pay the amount offered, and the rest of your tax debt is waived. 

Check out the Offer in Compromise Pre-Qualifier tool on the IRS website to see if you can avail of this tax relief program. If you think you qualify, fill out a financial statement, complete the required forms indicating your offer based on your disposable income and equity in assets.

6. Get a loan

Sometimes, it may be best to borrow from family members and friends to pay off your tax debt. Avoid lending from banks and other financial institutions to save yourself from paying interest charges, which can further put you in a difficult financial position.   

Another potential loan source is your 401(k) plan, but you have to check whether your provider allows you to do this. In some cases, half of your total 401(k) funds may be borrowed, or a maximum of $50,000, and payable within five years.

The Bottom Line

Continuing to ignore your tax responsibilities doesn’t make it go away, in fact, it can cause you a lot of legal troubles in the future.

Settle your tax liabilities on time to avoid paying substantial fees from penalties and other charges. If you can’t pay in full, apply for tax relief measures discussed in this article, most notably the Offer-In-Compromise, which allows you to pay a portion of what you owe.

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