Cannot Pay Your Taxes? Here’s What you should do

According to the IRS, there are more than 20 million Americans who owe back taxes, and more than 7 million non-filers. These numbers are expected to increase exponentially due to COVID-19. Many people do not file tax returns or file and do not pay the taxes due. You tell yourself that things are tough this year, but next year will be better. Before you know it, three years have passed, your tax debt is growing, and the dreaded IRS letter has arrived. We get it. We know that simply receiving a letter stamped IRS is enough to give you palpitations. Don’t worry, we successfully help clients through this every day.

Step #1 – Tax Compliance

This means that as of this moment all your returns are filed, and taxes paid. For employees, this means that your withholding is correct and 1040 is filed. For employers, your payroll taxes are paid up to the last quarter and for Non-filers, you must file the last 6 years of tax returns.

Step # 2 – Cannot Pay? Still file!

Most taxpayers think that if there is no money available to pay taxes owed then they are better off not filing. This is not the case. The Internal Revenue Service applies a 5% failure to file penalty (capped at 25%) on all unpaid tax liability. By failing to file you are simply adding a 25% increase to your tax liability!

Step #3 – Pay Current Taxes!

When funds are limited, pay the current taxes due to get in compliance. The IRS will not consider resolution unless you are compliant.

Collections Alternatives

Back tax debt can be resolved using three main collection alternatives: Installment Agreement, Uncollectible Status, and Offer-In-Compromise.

Installment Agreement

Installment agreements allow taxpayers to pay the tax debt over time. There are three variations to IA: Partial Pay, Streamlined, and Regular. The best agreement for the taxpayer is determined by personal circumstances.

Uncollectible Status

Using the reasonable collections formula, the IRS determines that the taxpayer is unable to make current payments due to income. Uncollectible status does not eradicate the debt and the IRS may still file a Notice of Federal Tax Lien against the taxpayer’s assets. However, no levy or seizure action will be taken.

Offer-In-Compromise

An Offer-In-Compromise is where the IRS accepts an amount less than the total tax debt owed in settlement for the entire tax debt. Negotiating an OIC is not as simple as it sounds. To successfully negotiate an OIC one of these specific grounds must exist:

• Doubt to liability- There is some doubt that you owe the tax debt.
• Doubt to collectability- It is doubtful that the IRS can collect the debt now or in the future.
• Effective tax administration-Special circumstances exist that would result in economic hardship or make it inequitable or unfair, even if the taxpayer may have sufficient assets and income.

 Additionally, the IRS requires taxpayers to remain in compliance for five years immediately following the OIC. If you or someone in your circle is dealing with an IRS nightmare of back taxes, interests, and penalties you do not have to go through this alone. Our tax experts will represent you with the IRS. You won’t even have to speak with an IRS agent. We do it all for you from the moment you receive the dreaded IRS letter to the final resolution.