Take a break
and read all about it!
First of all file the return. Even if you can’t pay anything with it, filing puts you in much better position to deal with the situation than if you hide from them and hope they go away….they WON’T!! Get your stuff to a tax professional and get some sort of return filed. Cheating the government out of their tax money is a criminal act and the IRS can and often does treat it that way. Filing and making an honest good faith effort to deal with the IRS means that the IRS is unlikely to throw you in jail or seize your home and there is a ten-year statute of limitations after which the IRS can not longer collect if you file and they make no effort to collect in that period of time.
Second if you CAN pay, pay them. Getting the IRS deeply involved in your life and your budget is still not a pleasant experience and an IRS debt is not bankruptable, so pay them if you can. Options to consider include taking out a home equity loan. Rates have never been lower than they are now and they are cheaper than the penalties and interest that will accrue on an IRS debt. For small amounts (less than $5000) apply to your bank for a personal loan. Banks do these all the time and often will lend $5,000 or less with little if any collateral required. Putting it on a credit card is another option, though interest rates will likely be much higher.
If you don’t have the money and can’t borrow it there are still options.
The first is to pay the IRS bill on installments. This is the best plan if you are confident that you can make the payments. There are two ways to do this: the first is to fill out form 9465 and attach it to your return.
This method takes longer. The second method is to apply for a payment plan online. The online payment method is much faster and you will know instantly if you are eligible. Generally if the debt is less than $50,000 and you can pay it back in less than six years the IRS will accept the installment plan. The IRS charges interest on your balance so paying an installment plan is going to cost you more than paying it now would and if the interest charged is greater than your payment the balance could actually increase and if your payment is so large that you can’t afford to pay this year’s taxes while paying the old tax debt you could spend your life in perpetual debt bondage to the IRS. A payment plan also does not prevent the IRS from filing a lien on your property. An IRS lien on your home or business can make getting credit much more difficult or even impossible.
If you owe the IRS, can’t pay it off, and can’t make payments to settle the IRS debt: it might be possible to settle the debt for less than you owe. This is called an offer in compromise. The IRS generally will not accept an offer in compromise if they believe that you could pay it off in either a lump sum or through an installment plan. To find out if you are even qualified for an offer in compromise, fill out the pre-qualifier online at http://irs.treasury.gov/oic_pre_qualifer/.
You can save a lot of money if they accept your offer in compromise; but this is a very risky strategy. First your IRS debt is growing and accumulating penalties and interest while the IRS takes their time deciding whether or not to accept your proposal. Second the application for an offer in compromise requires you to reveal all of your assets and sources of income. The IRS can refuse your offer in compromise and then use the information that you gave them to go after those assets (with accumulated interest.)
This information is for educational purposes only. For more information or an appointment to review your tax situation, please call our office at 205-451-1945.
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