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What Are Your Options if You Owe Taxes?

If you have received an IRS delinquency assessment you will generally be given a month to pay the owed amount in full or else the IRS will consider collection actions against you. No one will show up at your door but rather you will continue to receive a series of threatening notices demanding payment. If ignored, eventually you will be contacted in person by an IRS Revenue Officer.

If you decide not to contest the proposed assessment but simply cannot pay, you may decide to explain to the Revenue Officer that you cannot pay the taxes you owe in full right now.

But first, when considering your options, you must determine whether you intend to contest the assessment or accept same. This article discusses the most common options available in the event the amount of tax assessment is not contested.  This discussion applies to taxpayers who owe money to the federal or state tax authorities.  This article is limited to discussing civil tax remedies and does not address cases of criminal tax fraud.

  1. Credit Card Payment. You can pay your tax bill with a credit or debit card. The interest charged may still be less than the interest charged by the tax authority under their payment arrangement.
  2. Offer in Compromise. If you are unable to pay your taxes and it looks like your situation will not change for quite some time, you may wish to try and make an Offer in Compromise of all of your tax debt. You will be required to pay a non-refundable deposit and submit a financial statement disclosing your assets and your monthly income. The financial information given by you will be subject to verification by the IRS Revenue Officer handling your case. This program is especially effective in situations where there has been a loss of an income earner in the family, or a situation that permanently changes your ability to pay. The government examines your offer and determines whether it is in the best interest of the government to accept your offer. If the government concludes that it is in their interest, then your offer is usually accepted.
  3. Short Extension of Time to Pay. You may qualify for a short-term extension of time to pay your taxes. This program usually applies when you believe that you may fully pay your taxes in 120 days or less. To obtain the short-term extension, you can call the IRS at the telephone number listed on the last notice your received, or call 800-829-1040 to speak with a representative.
  4. On-Line Payment Agreement. If you are unable to pay your taxes in full because you either do not have the resources to do so or are unable to obtain a loan, then you can request a monthly payment plan. If the amount of your debt is $50,000.00 or less, you can apply for the plan by using the Internal Revenue Service (“IRS”) Online Payment Agreement Application. This is perhaps the easiest way to resolve your liability and, if approved, the tax service will notify you fairly quickly. A typical scenario would involve the IRS asking you about how much you can afford to pay. If that amount will satisfy the liability in under 72 months and before the 10-year collections statute of limitations expires, the IRS will generally approve the suggested amount.
  5. Formal Installment Agreement. If your IRS debt is more than $50,000.00 or you need a longer time to pay, you will need to provide the financial detail necessary to convince the IRS that it should grant an extended installment payment arrangement. The disadvantage of this plan is that penalties and interest continue to accrue on the unpaid balance. Therefore, the debt is paid off more slowly and is more costly than you may otherwise desire.
  6. The Fresh Start Program. If you owe $15,000.00 or less you can use the IRS “Fresh Start” program. The program generally makes it easier for individuals and small business taxpayers to pay delinquent taxes and avoid tax liens.
  7. Borrow from the Cash Value on Your Assets. Before the collection division will agree to an installment arrangement for paying back taxes, it generally requires taxpayers to borrow from the equity in their home, life insurance, pension, or other assets. During negotiations of this nature, it is important that you explain that you’ll agree to apply for a loan, but the amount and rate of repayment are usually not within your control.

To summarize, if you receive a tax assessment notice you should not ignore it. Instead, you should first determine whether you agree that the tax assessed is accurate. Once you have determined that, you should contact the IRS at the number provided on your notice of assessment for the purpose of explaining why you believe you do not owe the amount assessed, or that you will agree to make payment. If you decide on the latter, you will need to take stock of your financial ability to pay and if you are unable to borrow or utilize some of the options set forth above, then you will need to plan on contacting the IRS about an extended time to pay through a formal installment agreement. If you believe that you are unable to pay and that your financial situation will not change, then you might want to consider making a formal Offer-in-Compromise in settlement of your debt.

In any event, plan on providing financial information to the IRS if you will need more than five (5) months to pay off your tax debt.

Mark A. Krohn, LL.M Taxation, CPA and a partner at J&G, is in charge of the Business Law Team and is also a member of the Trust & Estates Team. He can be reached by phone at our Walden, NY office at 866-303-9595 toll free or 845-764-9656 and by email.

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