Each year, about 30 million taxpayers file a return with a balance due.
Most pay with the return. But what if a taxpayer cannot pay? What are their options?
Here are the options and a few tips:
Make sure you file on time: not filing because you owe is a major mistake. Within 5 months, you will add 25% to your tax bill due to the failure to file penalty. Don’t make things worse- file on time.
You have payment options: you can set up a payment plan with the IRS or get an extension to pay up to 120 days. IRS interest rates are fairly low (for example, 5% interest rate as of the first quarter of 2020).
You can’t avoid a late payment penalty by filing an extension: if a taxpayer files an extension and does not pay 90% of their final tax bill, they will get a failure to pay penalty of 0.5% per month when they file before the extended due date. This penalty is not a lot, but it can add up over time.
If you have a hardship, there are other options: if a taxpayer is experiencing a hardship that is affecting their income or ability to meet necessary living expenses, like unemployment, there are other options such a payment deferral (not collectible status) or an offer in compromise that will settle the tax debt. Beware that the taxpayer must qualify to receive these hardship relief provisions.
Act quickly to avoid a federal tax lien filing: if a taxpayer ignores the IRS notices for too long and owes more than $10,000, they can expect a federal tax lien to be filed. If they obtain currently not collectible status and owe more than $10,000, the IRS will also likely file a tax lien.
If this is your first time owing, request first-time penalty abatement relief: if you have to pay by an IRS payment plan and you did not have a penalty in the three years prior to that year (except for the estimated tax penalty), you can get the penalties waived. Taxpayers should request penalty abatement at the end of the payment plan to maximize the amount abated.
Under no conditions should you file late, not file at all, or not take action to request a payment option or collection alternative with the IRS.
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