Filing Taxes: What if I Owe More Than I Can Pay?
Taxpayers often find themselves in a position where they are unable to pay their taxes when it comes time to filing their federal income tax return. In these cases, it is imperative that they understand what options may be available to them to find out if they can as an individual negotiate directly with the IRS or if they need legal help.
One of the first things that taxpayers need to understand is that ignoring problems with the IRS do not make them go away. In fact, ignoring them could result in a much higher tax bill when the IRS catches up with them.
Taxpayers who wait for the IRS to contact them will be charged additional taxes, late fees, and interest charges. While not all of these can be prevented by negotiating with the IRS, in some cases they can be dramatically reduced. Here are some of the things that a taxpayer should do if they discover they are unable to submit full payment on a current tax return:
File the taxes on time – Taxpayers who are unable to pay the full amount of their current year tax return should file their return on time. This shows that the taxpayer is aware that they owe the tax and that they accept the obligation. One of the reasons that this step is so important is that the IRS will file a substitute tax return on behalf of the taxpayer if they are not filed. When a substitute return is filed, it is based on information that the IRS has available to them and may not include allowable deductions;
File a payment agreement request – Taxpayers should request a payment agreement with the Internal Revenue Service to help them pay any taxes that are owed. If the amount owed can be paid in less than 120 days, the taxpayer will save a considerable amount of money. Generally, the IRS will consider waiving penalties and interest on amounts that are paid this quickly. Extended payment agreements are available but will likely cost the taxpayer significantly more;
Pay as much as possible with the return – Paying as much as possible at the time of the tax filing will also help reduce a taxpayer's liability. This helps show good faith and also helps avoid penalties and interest charges on the portion that has been paid. This step also helps to provide the taxpayer with a more solid basis for opening negotiations.
It is important to understand that there are serious consequences to not filing taxes on time. Taxpayers who cannot pay their tax bills should still file their returns.
Back Taxes & Lack of Filings
What happens when a taxpayer has not filed taxes for a specific period of time? Regardless of how long it has been since a taxpayer has filed taxes, the first thing they should do is file all missing returns. This includes all years whether taxes were owed to the IRS or not. It is imperative that these returns are filed as quickly as possible and that the taxpayer gets a firm idea of how much they owe in back taxes.
Negotiating back tax payments
The Internal Revenue Service is ruthless when it comes to collecting back taxes. Levies on wages, tax liens on property, and a host of other possible repercussions can occur. Therefore, it is imperative that taxpayers begin negotiating with the Internal Revenue Service as quickly as possible when a taxpayer becomes aware of a deficiency in payment ability.
What options are available?
There are several options available to taxpayers who need help with tax liabilities.
1. Contact the IRS by telephone at 1-800-829-1040. Taxpayers should ask to speak with a taxpayer customer service representative to obtain information regarding back taxes and back tax filings. Taxpayers should explain the problem thoroughly and answer all questions honestly. One word of caution (offered by Nolo Law for All) is to be careful how much you disclose. Answer all questions honestly but do not elaborate;
2. File a request for taxpayer advocate assistance. The IRS provides a free service for all taxpayers that includes assignment of a taxpayer advocate. These IRS employees can help by providing information on how much is owed, what portion is taxes, which portion is penalties, and information on which tax filings (if any) are missing. The form for this request is Form 911;
3. File an offer in compromise. Taxpayers who are facing financial difficulties that are expected to last for a long period of time may be eligible for an offer in compromise. These taxpayers should review the IRS offer in compromise requirements, and if they feel they are eligible for this option, they should file the appropriate forms along with the required $150 application fee;
4. Injured (or innocent) spouse. Those who are behind on taxes as a result of lack of payment or filings by a spouse with whom they are no longer living with may be eligible for an innocent spouse negotiation. It is important to note that there are very specific requirements for this type of negotiation and the spouse (or former spouse) will be contacted by the Internal Revenue Service;
5. Installment payments. Taxpayers may be eligible to pay back taxes in installment payments. In this case, the proper paperwork will have to be filed and an agreement will have to be negotiated with the IRS to determine how much money the taxpayer has after normal expenses.
Taxpayers who are facing high tax bills, have failed to file taxes, or are unable to pay their current taxes have several options open to them. Filing taxes on time and contacting the Internal Revenue Service if there are problems can help save future issues with the IRS.
When a taxpayer is facing difficulty in paying their taxes, they need to understand how individuals can negotiate directly with the IRS. Taxpayers who are in serious financial straits should consider reaching out to local organizations which offer assistance to low income taxpayers.
Internal Revenue Service
- Other Ways to Resolve Tax Debt That Could Save You Money
- Form 911 – Taxpayer Advocate Service Assistance (PDF)
- Innocent Spouse Tax Relief Eligibility Explorer
- Payment Plans, Installment Agreements
- What is an Offer in Compromise
- Publication 4134, Low Income Taxpayer Clinic List (PDF)
- Publication 594, The IRS Collection Process (PDF)
- Form 656-A, Income Certification for Offer in Compromise Application Fee and Payment (PDF)
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