If your job or business has been affected by the COVID-19 pandemic, you may be concerned about your ability to pay taxes on time or to pay a delinquent tax debt. Fortunately, it may be possible to obtain relief from harsh IRS penalties and other consequences of the tax collection process, provided you take action soon. Here are some tips for doing so.
File on time
Even if you won’t be able to pay your full tax liability, be sure to file your return on time and pay as much as you can afford. Failure-to-file penalties accrue at a rate of 5% of your tax liability per month (up to a 25% maximum). Failure-to-pay penalties, on the other hand, accrue at only 0.5% per month (also up to a 25% maximum).
Request an undue hardship extension
It may be possible to obtain an extension if you’re able to show that paying the tax on time would cause undue hardship. Inconvenience isn’t enough; you must demonstrate that paying the tax when due would result in a substantial financial loss, such as selling property at a “sacrifice price.” And mere inability to pay is insufficient to avoid penalties. You must also show that you exercised ordinary business care and prudence in providing for payment of the tax liability but were prevented from doing so by unanticipated events.
Apply for a payment plan
Depending on your circumstances, you may avoid penalties (but not interest) if you qualify for a short-term payment plan (payment in 120 days or less) or an installment agreement (payment in more than 120 days). Generally, you’re eligible for a short-term payment plan if you owe less than $100,000 in combined tax, penalties and interest. An installment agreement is an option if you owe $50,000 or less in combined tax, penalties and interest, and have filed all required returns.
Seek an offer-in-compromise
An offer-in-compromise is essentially a settlement of your tax debt for less than the full amount you owe, which may be paid in a lump sum or installments. Qualifying for an offer-in-compromise isn’t easy, however. You’ll need to demonstrate to the IRS that, based on your assets and expected future income and expenses, it will be virtually impossible for the IRS to collect the full amount of your tax debt within a reasonable period of time.
Check out the Taxpayer Relief Initiative
This initiative provides additional options for people affected by the pandemic, including:
- Short-term payment plans may be extended from 120 days to 180 days,
- The IRS will automatically add certain new tax balances to existing installment agreements — ordinarily grounds for default,
- Some taxpayers who owe less than $250,000 will be able to obtain installment agreements without providing financial statements or substantiation and without the need for a federal tax lien on their property or income, and
- Taxpayers with existing direct debit installment agreements may request lower monthly payments or altered payment schedules online.
In addition, taxpayers who are unable to pay may request that the IRS temporarily delay the collection process until their financial condition improves.
Take care of your taxes
If you will have trouble paying your taxes on time, relief is available, but only if you’re proactive about asking for it. Ignoring the IRS won’t make it go away. Contact us or talk to your tax advisor for additional information.