Throughout 2023, the IRS collected over $104.1 billion in unpaid tax assessments from returns filed with additional tax due. If you currently owe the IRS a sum of money in federal tax debt, then it’s important for you to understand that you, too, could become subject to collection actions unless you make an effort to resolve your situation.
Multiple different options are available for managing your tax debt, from arranging a short-term payment plan to negotiating a better settlement option with the IRS. Whether you’re ready to make one massive lump sum payment or you need to make several long-term partial payments, Wiggam Law can help you navigate your complicated situation and find a reasonable solution to your tax woes.
Learn everything you need to know about your tax debt resolution options below.
Your Best Option: Paying What You Can Now
Like any bill you receive, the best way to completely resolve your situation if you receive an overdue tax bill is to pay everything in full right away. While that’s the best way to handle things, it’s not always a possibility.
Your next best bet is to invest in making the biggest possible partial payment that you can. In general, making a big payment will help the IRS recognize that you’re willing to work with them and you want to pay off what you owe. The bigger the payment you make up front, the better off you’ll be in the long run since that will mean smaller monthly payments or a payment plan that doesn’t last as long.
Consider how much you can pay upfront without causing yourself any financial distress, and set that aside. Next, you’ll want to consider your options for potentially reducing your overall debt burden. If you’re able to get the amount you owe reduced, then your partial payment will carry greater weight.
Sometimes, paying part of the debt can help you avoid serious consequences. For instance, if your tax debt gets over the “seriously delinquent” level, the IRS can tell the State Department to take away your passport. However, if you make a payment to get your tax debt under that threshold, you don’t have to worry about this happening.
Why You Should Always File on Time Even if You Can’t Pay it All
One of the biggest reasons that a taxpayer will delay filing their taxes on time is because they are afraid of receiving a bill that they can’t pay off. This is the reality for countless Americans each year. If you’ve found yourself in that category, then it’s essential to acknowledge the benefits of filing on time even when you can’t pay off your bill.
For one, filing on time helps the IRS weigh out your intentions. When the agency can see that you’re doing your best to file on time and accurately report your earnings, they’re more likely to work with you when it comes to negotiating a payment plan. For another, when you file your taxes on time, you avoid getting hit with penalties and fees.
Each month that you have an unfiled return, you’ll get charged up to 5% of your overdue tax balance. This fee will continue to increase and compound until it reaches a whopping 25% of your overall tax debt. That’s a massive increase in your overall tax burden, so it’s best to avoid this fee by filing on time when possible. In contrast, if you file but don’t pay, you’ll only incur the failure-to-pay penalty, which ranges from 0.025% to 0.5% per month.
Another important fact to consider is that you won’t slip through the cracks or avoid attention by not filing your taxes. The IRS knows who should be filing a tax return and who doesn’t need to, so don’t think that you can delay your tax bill or get away with your tax situation by simply not filing.
Consequences of Failing to File Your Taxes on Time
The consequences of failing to file your taxes on time are multi-pronged. For one, you will be charged a failure to file fee, compounding each month that you don’t resolve your balance. For another, the IRS will take note of your lack of cooperation. They may be less willing to negotiate on your terms and be more assertive.
Depending on your delinquency level, you might also face different levels of collection efforts from the IRS. These collection actions could include things like having your wages garnished, a levy being placed on your property, or even having your bank account seized. In order to stop collection efforts, you’ll need to show the IRS that you’re ready to start resolving your tax situation.
How to Request a Short-Term Payment Extension
If you can’t pay your full tax bill right away but think you’ll be able to do so in a short time period, then you should consider requesting a short-term payment extension. This type of arrangement will allow you to pay off your tax burden in the next 60-120 days, but you will still need to pay interest and penalties on your balance.
The good news is that by negotiating with the IRS, you will pay a lower rate on your interest, penalties, and fees. To request this extension, you will need to call the IRS collections line and request it.
Setting Up an Installment Agreement
Do you believe you’ll need longer than 180 days to pay off your remaining tax debt? If so, then you may be eligible to apply for a payment plan. A payment plan, also called an installment agreement, is a legally binding contract that you make with the IRS. In a nutshell, you agree to make consistent monthly payments, and the IRS will agree not to pursue collection efforts as long as you stay current on your plan.
In most cases, the maximum amount of time you’ll have to pay off your debt is 72 months. Typically, the IRS does not accept any time of payment plan that exceeds this time limit. In some cases, the IRS will only give you until the collection statute expiration date, 10 years from the assessment date, to pay off your installment plan.
Are You Eligible for a Payment Plan?
Not every taxpayer will be eligible to file for a payment plan with the IRS, especially if they haven’t been working with the tax agency in good faith. You will only be eligible to apply for a payment plan if your account is current. You must be up to date on filing your past required tax returns. This sometimes means having to have years of tax returns prepared and filed late in order to be eligible for an installment agreement.
You also won’t be eligible to file for a payment plan if the IRS knows you have the ability to pay but you simply have been avoiding your obligations. For instance, if you owe a tax debt and have been willfully and knowingly avoiding your tax burden, then the IRS may not be willing to agree to a payment plan. They may ask you to pay what you owe in full, considering your financial status allows you to do so.
What You Need to Start a Plan
Are you ready to apply for an installment agreement? If so, then your first step is to file your returns for any years you missed. You need to be current on filing your returns in order to be eligible for a plan.
You will want to have your bank routing and account numbers if you’re applying for a direct debit payment plan. Otherwise, you’ll want to have your tax identification information and your most recent IRS balance due notice to get started with the process.
How Will My Payment Plan Impact My Finances and Future Taxes?
Once you get started on your installment agreement, you need to work your payments into your monthly budget. You’ll need to prioritize your IRS payments. If you miss a payment or fall behind, then you could put your entire payment plan at risk.
You also need to make sure that you’re able to file and pay your future taxes on time. You may not be able to add a new balance to your existing payment plan, and you won’t be able to have two payment plans simultaneously. If you fall behind on your future tax obligations, then that will also put your installment agreement at risk—the IRS can terminate your plan if you go into default.
IRS tax debt does not appear on your credit report and doesn’t directly affect your credit score. However, if you ignore the debt and the IRS issues a tax lien, that is public record, and it can make it very difficult to obtain loans. Some payment plans will still result in a lien filing. You should discuss with a tax attorney whether a lien will be filed in your situation and what steps can be taken to avoid it.
Temporarily Delaying Collection
If you’re currently experiencing a financially turbulent time, then you need to inform the IRS about your economic situation. If you genuinely can’t pay your taxes without it causing financial distress, then the IRS can temporarily delay collection by filing your account under currently non-collectible status. You’ll have to prove that you have a genuine financial hardship, though, and the IRS could remove this account status if you bounce back financially in the future.
Other Possible Relief Options
Depending on your specific financial situation, other relief options might be possible for you. First-time IRS forgiveness, for example, can help you get relief from some of your penalties, but you’ll only qualify if you’ve had a clean filing and payment history for the three years prior to the tax year where you first were subject to penalties.
Penalty Abatement
Penalty abatement, whether it’s through a first-time abatement or for a reasonable cause, reduces your overall tax burden by forgiving some or all of your accrued penalties.
Removal of Penalties by Showing Reasonable Cause
If you can prove to the IRS that you were unable to comply with your tax obligations due to unforeseen circumstances outside of your control, then you can have some of your penalties removed for reasonable cause. Some circumstances the IRS will consider include natural disasters, a personal injury or accident, a death in the family, or extreme financial hardship.
Innocent Spouse Relief
Innocent spouse relief is a form of penalty relief available when one spouse understates the tax due by not reporting all of their income or claiming deductions incorrectly, and it would not be fair to hold the other spouse responsible.
When to Seek Out Professional Tax Help
If you’re experiencing a tax issue that you don’t know how to handle, then it might be time to seek out professional tax help. Since there are many types of tax experts, do your research to determine what type of tax professional will be best qualified to handle your needs.
FAQs: Delinquent Taxes and Your Options
Do you have more questions about delinquent taxes and your payment options? Generally, it’s best to get personalized advice from a tax professional who can consider your unique financial circumstances and facts surrounding your delinquency. That said, we’ll provide some general answers to some of the most frequently asked questions about delinquent taxes below.
How long will the IRS give me to pay off my tax debt?
The longest period of time the IRS will typically give you to pay off your tax debt is 120 months, as the IRS only has 10 years to collect on the debt. However, most payment plans with the IRS are for 72 months. Six years should be enough time for any taxpayer to navigate their debt. If it becomes financially impossible for you to resolve your debt, then it’s best to talk to the IRS about the changes to your financial situation.
What will happen if I miss a payment on my installment agreement?
If you miss a payment on your installment agreement, then your payment plan could be completely voided. It’s vital that you contact the IRS immediately if you don’t think you’ll be able to make a payment on your plan. There is a good chance the IRS will work with you, but it’s equally as important that you’re prioritizing your payment plan.
What will happen if I stop making payments on my installment agreement?
If you completely stop making payments on your installment agreement and you don’t get in touch with the IRS, then the tax agency will initiate collection efforts. The moment you miss a payment, your contract is considered void.
Are You Ready to Talk to a Tax Resolution Lawyer?
Being on the wrong side of the IRS is intimidating for anyone, especially if you don’t have the financial means to pacify the agency’s anger if you’ve failed to pay your tax burden for a long time. The good news is that the IRS is typically willing to meet you where you are and work with you in good faith. All they ask is that you are honest about what you can pay and make a good effort to meet your payment obligations if a plan is arranged.
Here at Wiggam Law, we can facilitate all your negotiations with the IRS. We will ensure that your tax attorney considers all your potential debt relief options and weighs out the best financial strategy to meet your needs. If you’re ready to talk with us about your financial situation, then call us at (404) 609-1300 or fill out the form below to schedule a consultation with our team today.