There are many circumstances which may impact an individual’s ability to pay taxes. If you find yourself in this situation, you may be asking yourself “What if I can’t pay my taxes? What do I do? Do I have options?”. In this guide, we’ll explore what can be done if you can’t pay taxes.
If you earn enough money to owe taxes, meeting your responsibilities as a taxpayer shouldn’t be a problem on paper. Yet unforeseen circumstances, a missed mail, a mistake on your tax returns, and a dozen other potential hiccups can lead to a larger tax bill at the end of the year than you might have expected; and sometimes, a tax debt you can’t pay.
This is especially true for those hit hardest by the pandemic, as well as other personal tragedies. While the IRS has offered relief for delinquent tax payments and debts, many taxpayers are entering the new year in debt to the IRS.
What Should You Do If You Can’t Pay Taxes?
If you can’t your taxes, don’t panic. There are ways to resolve your debt. Depending on your circumstances and financial situation, a tax debt to the IRS can be negotiated, paid down over time, or delayed for months and years.
Here are five options if you are struggling to pay your taxes.
Paying Your Taxes Later
The first misconception is that when the IRS sends you a bill for any overdue taxes, they expect you to pay immediately. The truth is that the IRS expects a response immediately. You don’t need to pay off the entire debt, but you do need to act as soon as possible, such as starting a short-term or long-term payment plan.
If the IRS doesn’t hear back from you within 10 days after you’ve received their Notice of Deficiency, your tax debt may be hit with additional penalties. These can be avoided by beginning a payment plan you can afford.
Short-term payment plans involve several lump sum payments made within 120 days. Payment plants exceeding 120 days in length usually involve monthly installment payments. Setup fees for these payment plans differ, depending on whether you’re filing electronically or not, and whether you’ve set your plan up to include automatic payments (from a connected account) or not.
If the IRS has already began taking action against you, through liens and levies, then beginning a payment plan can be a good first step towards stopping these collection efforts. The IRS does not always require you to pay off your entire debt before they lift a federal tax lien, for example. There are other eligibility requirements when seeking an end to IRS collection efforts, like being up to date with your tax returns and estimated payments.
Negotiating for a Lower Tax Debt
When faced with dire circumstances, the average taxpayer may not be able to pay off their entire debt in a reasonable time frame. If you can’t pay your taxes within a year or two of regular monthly payments, you may want to consider other alternatives – such as negotiating for a reduced tax debt, through an offer in compromise. An offer in compromise is a payment plan where you suggest what you can pay, and it’s up to the IRS to accept the offer.
These can be complex and difficult to negotiate, as the IRS can be picky about accepting offers in compromise and will do its own research to determine if your offer matches up with what they think you can pay. The IRS offers its own online pre-qualifier tool to help taxpayers figure out their eligibility. However, your best bet lies in talking to a tax professional.
Arguing Financial Hardship
If you can’t pay your taxes, the IRS will utilize different collection actions to coerce payment. These can be financially devastating, and include federal tax liens, asset and property seizures (levies), and wage garnishment.
But if you’re in no position to offer up anything to the government, arguing for a currently not collectible status will protect you from any collection actions. But your debt will continue to accumulate.
This is a temporary measure to help you get back on your feet without the IRS applying direct pressure on your finances, and it can help you get out of wage garnishments or avoid a tax levy. However, it does not lift a tax lien.
Filing for Bankruptcy as Tax Relief
Another last resort when payment plans are not an option, is bankruptcy. While bankruptcy can absolve most debts, it cannot wipe out a federal tax debt automatically. If you file for Chapter 7 bankruptcy, for example, you may potentially have the option of discharging your federal tax debt, if you’re eligible. Furthermore, only income tax debt can potentially be eliminated through bankruptcy.
The IRS also requires that your debt is no older than three years old, that you file for bankruptcy within 240 days of the tax assessment date, and that you continue to make estimated payments and file your returns on time for the duration of the bankruptcy, and thereafter. Another requirement is that you file your returns for the four years prior to the bankruptcy, if you haven’t already.
The rules change somewhat for Chapter 13 bankruptcies. Either way, this process can be complicated and may require the help of a professional. If you don’t take proper action, your bankruptcy will not wipe out your debt, and you will continue to owe the government after the proceedings have ended.
It should also be noted that while a bankruptcy proceeding protects you from IRS collection efforts, it also stops the clock on your debt – meaning it will take longer for your tax debt to expire.
The Benefits of Professional Help If You Can’t Pay Your Taxes
Dealing with taxes can be difficult, especially when money is tight, and you have plenty of other things to worry about. The IRS often updates its rules and provides taxpayers with plenty of information to make sense of their situation – but it isn’t easy to keep track of every new change and discern what is and isn’t relevant to you and your circumstances.
By working with Rush Tax Resolution, you can be sure that your tax debt will be resolved in the most effective manner possible. Our services help taxpayers reduce their debt, avoid unnecessary penalties and interest, and navigate the difficult waters of the IRS’s tax rulebook.
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