Ways to Deal with Back Taxes and the IRS
Introduction:
Dealing with back taxes can be a stressful and overwhelming experience. However, there are strategies you can implement to effectively tackle this issue and avoid further penalties. In this article, we will explore various methods to address unpaid taxes and provide valuable insights on what not to do in such situations.
Act Immediately With Overdue Taxes:
When facing unpaid taxes, it is crucial to act promptly. Even if you are unable to pay the full amount, it is essential to file your taxes by the due date or request an extension. Failure to do so incurs a penalty of 5 percent for each month you don’t file, with a maximum charge of 25 percent. Additionally, you will also face late penalties and interest charges, exacerbating the situation. By filing on time and making partial payments if possible, you can mitigate the financial burden.
Contact the IRS:
While it may be daunting, reaching out to the IRS can be your saving grace when dealing with unpaid taxes. To initiate tax payments, attach Form 9465, an “Installment Agreement Request,” to your tax return. If the amount owed is under $25,000, you can streamline the process and pay it off within five years. For balances below $50,000, online payments are available.
It is important to include the proposed monthly payment amount and the desired payment date in your request. The IRS charges a $43 setup fee, along with interest and a penalty of 0.5 percent per month. However, once the installment agreement is approved and your return was filed on time, the penalty drops to 0.25 percent. It is crucial not to have received a levy notice from the IRS to be eligible for this option.
Offer in Compromise:
If you find yourself unable to pay your taxes even with an installment plan, you have the option to apply for an “Offer in Compromise.” This allows you to settle your debt for less than the full amount owed. To initiate this process, you will need to send Form 656 for the Offer in Compromise and Form 433A “Collection Information Statement” to the IRS. They will assess your financial situation and income potential to determine whether your offer is suitable.
Request Short-Term Extension:
If you are facing a temporary cash crunch and need a couple of months to pay your tax bill, applying for a short-term extension is a viable option. The IRS allows up to 120 days to pay the full tax balance without charging a fee for the extension. However, keep in mind that there is a penalty of 0.05 percent per month on the unpaid balance during this period.
Borrow Money From 401(k) or Personal Loan:
In certain cases, borrowing money from your 401(k) or obtaining a personal loan can help address your tax obligations. A 401(k) loan typically allows you to borrow up to 50 percent of your savings, with a maximum limit of $50,000. The loan must be repaid within five years. While this option can be cost-effective, it may impact your retirement savings and reduce your money’s earning potential.
Alternatively, you can consider applying for a personal loan or using credit cards to cover your tax debt. However, it is essential to exercise caution and evaluate which option works best for your financial situation. Accumulating further debt should be avoided, as it can exacerbate the challenges you face. It is worth noting that the IRS may inquire about exhausting these alternatives before engaging in negotiations.
What Not to Do if You Owe Back Taxes:
When dealing with back taxes, it is crucial to avoid certain actions that can worsen your situation. Firstly, it is advisable not to seek assistance from tax relief services as they often charge hefty fees for services you could handle yourself. Instead, take the initiative to resolve the issue independently.
Additionally, neglecting to file your tax return on time should be avoided at all costs. If you are unable to meet the deadline, filing an extension can help you avoid a failure-to-file penalty. Ignoring the IRS can have severe consequences, such as passport revocation, property liens, or wage garnishment. While the IRS does not resort to these measures immediately, it is vital to respond to their notices and proactively address the issue.
Be Proactive and Correct Your Tax Problem:
If you find yourself owing taxes, it is essential to assess what went wrong in the first place. If your paycheck deductions are insufficient, consider increasing them to avoid future tax debts. Similarly, if you are self-employed, ensure that you diligently pay quarterly taxes to prevent a recurring cycle of owing money.
Taking proactive measures to address your tax problem showcases responsibility and increases the likelihood of the IRS being willing to negotiate with you in the future.
Conclusion:
Dealing with back taxes and the IRS can be initially overwhelming, but by following the right steps, you can effectively manage the situation. Acting promptly, contacting the IRS, exploring options like installment agreements and offers in compromise, and avoiding detrimental actions will help you navigate this challenging process. Remember, being proactive and taking corrective measures is key to avoiding future tax problems.
