Strategies & Solutions If You Can't Afford to Pay Your Taxes

You owe taxes and you can’t pay them.  Now what?

So, you owe taxes, and the thought of that looming debt is causing you sleepless nights. The good news is, there are options available, and you don't have to hide from the IRS. Let's break down the steps you can take to address your tax situation.

1. File Your Tax Return, Even If You Can't Pay

This might seem counterintuitive, but filing your return is crucial, even if you can't pay anything towards your debt. Filing shows the IRS you're acknowledging your responsibility and working towards a solution. It also starts a 10-year clock ticking. After ten years, if the IRS hasn't actively pursued collection, they generally can't come after you anymore (with some exceptions). Ignoring the problem will only make it worse. Penalties and interest will continue to accrue, and the IRS has a variety of collection tools at their disposal, including wage garnishments and property liens.

2. Explore Payment Options If You Can Afford Them

If you have the resources, it's always best to pay your tax debt in full as soon as possible. This minimizes the amount of interest and penalties you'll accrue. Here are a few options to consider:

• Home Equity Loan: With historically low-interest rates, a home equity loan can be a good way to access funds for a lump-sum payment. Just remember, you're putting your home on the line, so ensure you can comfortably afford the repayments.

• Personal Loan: For smaller tax debts (under $5,000), a personal loan from your bank might be an option. Banks often offer these loans with minimal collateral required.

• Credit Card: While not ideal due to high-interest rates, a credit card could be a last resort for smaller debts. However, be mindful of the additional debt this creates and develop a plan to pay it off quickly.

If you don’t have the money and can’t borrow it there are still options.

3. Installment Plans: A Viable Option with Caveats

If you can't pay your debt in full but have a steady income stream, an installment plan with the IRS might be the answer. There are two ways to set this up:

• Form 9465: This is the traditional method, but it takes longer for approval.

• Online Payment Plan: This is a faster option, allowing you to know your eligibility instantly.

However, keep these things in mind with installment plans:

• Interest Still Accrues: This means your debt will likely cost more overall than a lump-sum payment.

• Potential Balance Increase: If the interest charged exceeds your monthly payment, your balance could actually grow.

• Limited Ability to Pay Current Taxes: Make sure you can afford both your current year's taxes and your installment payments to avoid falling further behind.

• Liens Still Possible: An installment plan doesn't prevent the IRS from placing a lien on your property, which can make it difficult to obtain credit.

4. Offer in Compromise: Settle for Less (But Proceed with Caution)

If you genuinely can't pay your debt in full and can't afford an installment plan, the Offer in Compromise (OIC) program allows you to settle for a lesser amount. However, the IRS is selective about who qualifies. They generally won't accept an offer if they believe you have the means to pay the full amount.

The pros and cons of the OIC program:

The Offer in Compromise (OIC) program can be a tempting solution for those struggling with significant tax debt. It allows you to potentially settle your debt for a much smaller amount than what you originally owe. However, this program comes with its own set of challenges, and it's not for everyone. Let's take a closer look at the pros and cons to help you decide if it's the right path for you.

Pros:

• Significant Debt Reduction: The biggest advantage of the OIC program is the potential for substantial savings. If your offer is accepted, you could resolve your tax debt for a fraction of the original amount. This can be a huge weight off your shoulders and provide much-needed financial relief.

• Improved Credit Score: Once your tax debt is settled through the OIC program, your credit score can see a significant improvement. This can make it easier to qualify for loans, mortgages, and other forms of credit in the future, with potentially better interest rates.

• Avoid Wage Garnishment or Liens: If you're facing the threat of wage garnishment or property liens from the IRS, the OIC program can help you avoid these unpleasant situations. Once your offer is accepted, the IRS will stop all collection efforts.

  

Cons:

• Time-Consuming Process: The OIC application process can be lengthy and complex. It can take several months, even up to a year, for the IRS to review your offer and make a decision. During this time, interest and penalties will continue to accrue on your debt, potentially increasing the overall amount you owe.

• Financial Disclosure: The OIC program requires extensive financial disclosure. You'll need to provide detailed information about your assets, income, and expenses. This can be a time-consuming task and can feel intrusive. Be aware that the IRS will use this information to evaluate your offer and may deny it if they believe you have the ability to pay the full amount.

• Rejection Risk: There's no guarantee your offer will be accepted. The IRS carefully considers various factors, including your income, assets, future earning potential, and the overall fairness of the offer. If your offer is rejected, you'll still be responsible for the original debt plus accumulated interest and penalties. This can be a devastating blow financially and emotionally.

• Tax Implications: The amount of debt forgiven through the OIC program is considered taxable income by the IRS. This means you may owe additional taxes on the forgiven amount, depending on your overall tax situation.

Additional Considerations:

• Credit Report Impact: Even though your financial obligation is settled, the OIC program will be reflected on your credit report for up to five years. This may make it more difficult to qualify for certain types of credit during that time period.

• Professional Help: The OIC program can be difficult, and seeking help from a qualified tax professional can significantly increase your chances of success. They can guide you through the application process, ensure your offer is reasonable, and represent you in negotiations with the IRS.

The OIC program can be a valuable tool for those facing overwhelming tax debt. However, it's important to weigh the pros and cons carefully and understand the risks involved. If you're considering the OIC program, consulting with a tax professional to assess your eligibility and develop a strategic approach is highly recommended.

While an Offer in Compromise can potentially reduce your IRS debt significantly, it carries substantial risks that need to be carefully managed. A thorough understanding of these risks and strategic financial planning are critical components of effective financial management when dealing with tax debt.

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.