Here’s a guest post from Brian Brown, C.P.A. He offers advice on what to do if you find you can’t pay your taxes.
With enthusiasm and boldness, you head into 2007 with hopes of greater discipline in spending, saving and investing. However, much to your dismay, the first part of 2007 brings the inevitable day of reconciliation with Uncle Sam in the form of filing your annual 1040 tax return. Perhaps your situation worsens further when you realize that you can’t pay the amount due Uncle Sam per your 1040 tax return. Don’t worry — you are not alone. This is a common occurrence. Accordingly, the Internal Revenue Service provides certain tools for arranging payment by taxpayers.
Let’s first examine the steps prior to engaging the IRS tools.
- First and foremost, file your tax return! A common occurrence is that taxpayers freeze at this point not knowing what to do. In many cases, they just don’t file. Don’t fall into this trap. An individual should file the tax return to avoid penalties for failure-to-file.
- You could also file an extension via Form 4868. This does not give your six months of relief from paying; rather, you must estimate with reasonable accuracy and still make payment.
So, now I’ve filed, but can’t pay! Well, take a deep breath. You are not going to jail. However, you are still obligated to pay. Before engaging the resources of the IRS to make payment, first explore your own personal resources.
Can you temporarily borrow from friends or family? In not, go to plan B. Do you have credit card availability? You can pay with a credit card, but the flip side is that you will pay a much higher rate with the credit card company than with the IRS. You can go this route if you want to get the IRS off your back, but then again you are really putting yourself in a bind with the high interest rate.
Let’s now assume that you have extinguished all potential sources of funds and you are ready to jump off a cliff. Again, take a deep breath. As mentioned, the IRS does provide tools for arranging payment.
- The first route is via Form 9465, Installment Agreement Request (PDF). You supply the terms based on your ability to pay over the next few years. If the amount owed is under $10,000, the IRS will accept most reasonable offers to pay within 36 months. Otherwise, larger amounts may require further correspondence and data gathering for the IRS. By entering the installment agreement, the taxpayer is given some space in paying over time but also pledges to stay current on future taxes.
- Still, let’s say the installment agreement just won’t work for your circumstances. What now? The taxpayer is entitled to file a Form 656, Offer in Compromise (PDF) application and Form 433-A, Collection Information Statement (PDF). This is essentially based on economic hardship given the circumstances. Now, please know that is more of a tool in extreme circumstances. Obviously, the IRS has a vested interest in getting some payment rather than nothing at all. They want to settle but at a fair amount given the financial resources or lack thereof for the taxpayer. As always, taxpayers in such circumstances should consult with a CPA to adequately address the circumstances.
- The final course of action is bankruptcy. However, this does not relieve all tax debts rather just suspends collection. In any event, this is a situation that requires the engagement of a qualified attorney for such matters.
Regardless the course of action, one key is respectful and voluntary communication with the IRS. Put it in writing. For further information, see IRS Topic 202 — How to Pay Your Taxes.
Brian contributed heavily to the previous GRS article about how to find an accountant.
GRS is committed to helping our readers save and achieve your financial goals.Savings interest rates may be low, but that’s all the more reason to shop for the best rate.Find the highest savings interest rate from Ally Bank, Capital One 360, Everbank, and more.
This article is about Taxes
SEARCH FOR RECENT ARTICLES