Although recent changes in the tax law brought some new deductions and reductions in the highest marginal tax brackets, the loss or limitation of many deductions and changes in the tax withholding tables have left many taxpayers with an unexpected bill to pay. For taxpayers who do not have the cash available to pay the debt, the IRS and many state taxing authorities, including Virginia, Maryland and DC, provide options. If you find yourself with a large tax bill, before using a credit card or a high-interest personal loan to pay the tax you might want to consider your options.
Depending on the balance owed there are several different options available to help taxpayers pay outstanding tax bills:
- Taxpayers who owe less than $100,000 can go online and request a short-term online payment arrangement (OPA) to pay the debt in full within 120 days.
- Taxpayers who owe less than $10,000 can enter into a guaranteed installment agreement that can spread the liability into monthly payments over 36 months.
- For those who owe more than $10,000 but less than $50,000 a streamlined installment agreement is an option. These agreements require the applicant to provide some additional financial information, but still allow payment of the tax over a period of up to 84 months.
Penalties and interest still apply during the term of an installment agreement, but execution of a written installment agreement lowers the failure to pay penalty from 0.50% per month to 0.25% per month. This interest rate, which equates to between 3% and 6% per year, is still decidedly lower than the rates typically charged on credit cards or high-interest personal loans.
There is also a one-time fee of up to $225 charged by the IRS to implement an installment agreement. However, by applying online and agreeing to have payments automatically debited from your bank account each month, the fee can be as low as $31.
While a short-term payment plan or installment agreement are excellent options for many taxpayers, for those who may be experiencing serious financial hardships there are other alternatives. An Offer-in-Compromise (OIC) is a program that allows a taxpayer to pay a lower amount in full satisfaction of their tax liability (including interest and penalties). To enter an OIC, the taxpayer must provide a significant amount of information regarding their assets, liabilities, income and expenses to document that they do not have the ability to fully pay the debt over time
Taxpayer’s experiencing financial hardships can also request a temporary delay in collection activity based on their current financial position. This status puts IRS collection efforts on hold until the taxpayer’s financial condition improves. While this may provide some relief, it is important to note that it is likely that the IRS will still file a Notice of Federal Tax Lien to secure the liability. Also, penalties and interest continue to accrue until the liability is paid in full.
Regardless of your ability to pay your taxes, it is always important to timely file your returns. In addition to late payment penalties, the IRS also applies penalties for late filing. Ignoring a tax liability by failing to file your returns will only exacerbate your tax problems and likely significantly increase your final liability.
If you have a significant tax liability and need assistance navigating the collections process with the IRS, Thompson Greenspon has experienced professionals who can help you determine the best course of action for your situation. Contact us today to see how we can help.
About the Author:
Eric Fletcher is a principal with Thompson Greenspon and has more than 20 years of public accounting experience as a tax professional. Throughout his career, Eric has focused on working with closely-held businesses and their owners, especially family-run enterprises. He has served clients in the construction, real estate, and professional services industries in addition to working with many affluent individuals and family groups. His expertise includes all aspects of tax and business planning including mergers and acquisitions, private equity, succession and estate planning, capital budgeting and investment analysis, as well as IRS representation.
Prior to joining the firm, Eric worked for several regional and large local accounting firms. He is a native of Alabama and began his career working in the Birmingham office of one of the South’s largest regional firms. Eric has authored many articles on tax and business planning for trade journals and business publications and is frequently called upon to present to professional groups and trade organizations.
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