Having an inability to pay off a personal balance to the IRS no doubt creates a tense, and perhaps more appropriately, a taxing situation. The IRS wants individuals to make timely payment on their tax obligations, but at the same time also recognizes that some are unable to do so. With that in mind, you may be able to take advantage of a number of options that the IRS currently offers, but the first step is up to you.
The image of the IRS in the mind’s eye of the typical taxpayer may vary. One popular reputation has the IRS as a powerful government entity, able to make unsympathetic and sweeping verdicts with little or no deliberation. Although this long-standing repute has been softened by years of friendly customer service and quality assistance, the opinion of many still reflects the latter.
With no help, by the way, from the paid preparers and representatives who easily take advantage of the notion that a person cannot possibly talk to the IRS directly to resolve their balance without getting flattened by a Zamboni with Uncle Sam at the helm. But I digress.
For this reason, instead of being proactive, some individuals may let a tax balance just sit, and sit, and sit some more. They feel that they are better served working behind the scenes until they can contact the IRS and offer a clear method of repayment. However, this is a shaky way to address your tax balance. Unfortunately, your tax balance does not age like a fine wine, it grows like a weed.
The first thing the IRS encourages when one’s tax bill is about to become due, or overdue, is to contact the IRS immediately. Any representative from the IRS will be happy to discuss your payment options with you. A return that is not fully paid by the due date will incur penalties and interest. If the balance continues to be disregarded, then collection may ensue. You may very well intend to make a full payment as soon as you are able, but the IRS does not realize this if their letters and phone calls go unheeded.
In relation to the above, one important thing to keep in mind: Even if you cannot pay your total balance due by the return due date, still file timely. A late-filed return that carries a balance due incurs penalties at a much higher rate than a return filed timely. If you have a refund, generally there are no fees for not filing on time.
You may also use Form 4868 to request an automatic six-month extension to file, no questions asked. Remember though, that an extension to file is NOT an extension to pay. You still must make an estimation of your potential tax liability and send in a payment, along with the extension, the April 15th due date.
Before making payment arrangements, be sure you have a clear understanding of why the IRS is telling you that you owe. The IRS wants you to recognize and identify where the balance originated. As much as you do not want to talk to the IRS more than once, they also do not want to have to revisit and resolve another tax balance with you. Be prepared to discuss why you owe. If you are a wage earner, the IRS may want to discuss your W-4 statement to be sure that you are having the appropriate amount withheld for federal tax. If you are self-employed, the IRS will confer with you regarding your responsibilities to make estimated tax payments, and will help you to do so.
If you filed the return with a refund, and now you have a letter proposing a balance, read through it carefully and respond accordingly. In many cases, the balance may be easily rectified. Perhaps a W-2 was missing and the Service has denied a portion of your Federal Tax Withholding. If the Social Security number of your dependent child is wrong, even by just one digit, you may see a hefty tax increase. This small typo will cause your exemptions to be reduced, and may cancel out your Child Tax Credit and Earned Income Credit, among others. Again, this is an easy fix. Any of these simple “math error” problems can often be effortlessly corrected with one call.
If a number of months or perhaps years have gone by before the IRS has notified you of a balance, then your return likely has been selected for an audit. Contrary to popular belief, the majority of audits are done via mail. The most common trigger for a potential assessment is under-reported income. In other words, income has been reported to the IRS that was not included on your return, and now the IRS has reconciled the difference.
Popular income sources that are reported to the IRS but left off of one’s return include 1099 self-employment income, gambling winnings, taxable pension or IRA distributions, 1099-C Debt Cancellations and unemployment. Be sure to include ALL income sources. If you are missing a W-2 or 1099, and the due date of your return is fast approaching, contact the IRS. If required, they will help you prepare a substitute document. Do NOT simply file and purposely omit the income.
If your tax return shows a balance that you cannot pay, you may send in the return with Form 9465, Installment Agreement Request. Depending on the amount owed and the amount you are proposing to pay per month, the IRS can automatically establish a payment plan for you. In general, the IRS can offer you up to four months to make repayment, without any additional fees other than the required penalty(s) and or interest. If you need a longer-term plan, a one-time user fee will be charged to cover the cost of the arrangement. Options include payment via check or money order, online credit card payments, direct debiting out a checking account, or a payroll deduction arrangement made with your employer.
Some may advocate immediately seeking third party counsel when confronted with a balance due. The IRS is happy to work with any authorized legal representative, but you should know that there are NO options available to a CPA, attorney or anyone else that are not available to the taxpayer directly. An experienced accountant may have a better understanding of these options, but unless you have a sizeable or unmanageable debt, are navigating through a complex appeal process, or have a convoluted tax problem, retaining (and paying) for third party litigation is often an unfortunate squandering of your funds.
Remember, contact the IRS timely and be patient while they explain your balance and discuss your options. Depending on your situation, you may also be eligible to have some of the penalties (but not the interest) waived or lowered. If you recognize your accountability for your balance and make a judicious effort to resolve it, you will find the IRS to be responsive and easy to work with.