It’s much easier than most people think to fall behind on taxes. An unexpected expense or moment of forgetfulness leads to a missed tax return, and suddenly you’re in debt to the IRS. Oftentimes, people don’t even realize they have a tax debt, leading to it increasing over time due to IRS penalties and interest. If you’ve recently discovered that you have overdue taxes, you’re probably in a bit of a panic. It can feel impossible to pay off your tax debt in a timely manner. Fortunately, you do have options. Let’s look at how you can get current on your taxes.
Determine Exactly What You Owe
First things first, you need to figure out exactly how much you owe in back taxes. This can be done by reviewing all correspondence that the IRS has sent you so far. Within this correspondence, you should be able to find the outstanding balances you owe for each tax year. Additionally, it should tell you how much of what you owe is penalties and interest. Once you know how much you owe, it will be easier to decide how to proceed. You may find that you owe much less than you thought, allowing you to pay it off immediately in one lump sum. Alternatively, you may find that you owe more than you can comfortably pay at once. If this is the case, don’t panic. It simply means it is time to start exploring other payment options.
File Any Missing Tax Returns
Next you need to file any missing tax returns. You see, the IRS views filing and paying as two completely different responsibilities, and applies different penalties for each. The different penalties are as follows:
●Failure-to-File: When you file late, the penalty is 5% of your unpaid taxes for each month or partial month the return is late (capped at 25%). If both Failure-to-File and Failure-to-Pay apply in the same month, the Failure-to-File rate is reduced to 4.5%, keeping the combined monthly penalty at 5%.
●Failure-to-Pay: When you fail to pay the taxes you owe by the due date, the resulting penalty is 0.5% of the unpaid taxes for each month or partial month that the tax remains unpaid. This penalty also accrues up to a maximum of 25%.
As you can see, the penalty for not filing is the much higher of the two. This is why filing is so important. If you leave returns unfiled, it will cause your debt to increase much more rapidly.
Photo by Mark Youso
Explore Your Options for Resolving Tax Debt
As mentioned, there are a number of options for resolving your tax debt. These options include:
●Paying the balance in full: This is the quickest way to get current on your taxes. You simply pay what you owe all at once. Of course, depending on the amount you owe, this option may be impossible for many people.
●Offer in Compromise: An offer in compromise is when you offer to pay less than you owe. It should be noted that the IRS won’t accept just any Offer in Compromise. They will review your income, monthly expenses, asset equity, and overall ability to pay. The IRS will only accept your proposal if they believe that collecting the full amount is unlikely or would cause severe financial hardship.
●Currently Not Collectible status: This is an IRS account status that is only granted when financial hardship prevents you from paying your tax debt and basic living expenses at the same time. When you are given CNC status, the IRS temporarily stops active collection efforts. It should be noted that this does not erase your debt and will not get you current on your taxes. It just protects you from collection efforts until you are in a better financial position.
Which of these is right for you will depend on your financial situation and the amount you owe. However, there is one more option that is often best for people who owe a moderate amount and have a stable income. This is the installment agreement.
Consider an IRS Installment Agreement
An IRS installment agreement is a formal payment plan that allows you to pay off your tax debt in scheduled monthly installments over an extended period of time. For most people, this is much more realistic than paying it all at once. You can apply for a tax installment agreement by phone, mail, or online. It may be in your best interest to have a tax professional negotiate with the IRS on your behalf. They will be able to help you get an installment agreement that you can easily pay without financially burdening yourself.
Staying Current After Resolving Your Tax Debt
After resolving your tax debt, it is extremely important that you stay current on your taxes in the future. You should not make a habit of falling behind on your taxes. You should:
● Establish a system for tracking tax obligations
● Set aside money for future tax bills
● Review withholding or estimated payments periodically
● Keep tax records organized
● Address new tax problems promptly
Doing these things will help ensure that you never fall behind on your taxes again.
It’s much easier than most people think to fall behind on taxes. An unexpected expense or moment of forgetfulness leads to a missed tax return, and suddenly you’re in debt to the IRS. Oftentimes, people don’t even realize they have a tax debt, leading to it increasing over time due to IRS penalties and interest. If you’ve recently discovered that you have overdue taxes, you’re probably in a bit of a panic. It can feel impossible to pay off your tax debt in a timely manner. Fortunately, you do have options. Let’s look at how you can get current on your taxes.
Determine Exactly What You Owe
First things first, you need to figure out exactly how much you owe in back taxes. This can be done by reviewing all correspondence that the IRS has sent you so far. Within this correspondence, you should be able to find the outstanding balances you owe for each tax year. Additionally, it should tell you how much of what you owe is penalties and interest. Once you know how much you owe, it will be easier to decide how to proceed. You may find that you owe much less than you thought, allowing you to pay it off immediately in one lump sum. Alternatively, you may find that you owe more than you can comfortably pay at once. If this is the case, don’t panic. It simply means it is time to start exploring other payment options.
File Any Missing Tax Returns
Next you need to file any missing tax returns. You see, the IRS views filing and paying as two completely different responsibilities, and applies different penalties for each. The different penalties are as follows:
● Failure-to-File: When you file late, the penalty is 5% of your unpaid taxes for each month or partial month the return is late (capped at 25%). If both Failure-to-File and Failure-to-Pay apply in the same month, the Failure-to-File rate is reduced to 4.5%, keeping the combined monthly penalty at 5%.
● Failure-to-Pay: When you fail to pay the taxes you owe by the due date, the resulting penalty is 0.5% of the unpaid taxes for each month or partial month that the tax remains unpaid. This penalty also accrues up to a maximum of 25%.
As you can see, the penalty for not filing is the much higher of the two. This is why filing is so important. If you leave returns unfiled, it will cause your debt to increase much more rapidly.
Explore Your Options for Resolving Tax Debt
As mentioned, there are a number of options for resolving your tax debt. These options include:
● Paying the balance in full: This is the quickest way to get current on your taxes. You simply pay what you owe all at once. Of course, depending on the amount you owe, this option may be impossible for many people.
● Offer in Compromise: An offer in compromise is when you offer to pay less than you owe. It should be noted that the IRS won’t accept just any Offer in Compromise. They will review your income, monthly expenses, asset equity, and overall ability to pay. The IRS will only accept your proposal if they believe that collecting the full amount is unlikely or would cause severe financial hardship.
● Currently Not Collectible status: This is an IRS account status that is only granted when financial hardship prevents you from paying your tax debt and basic living expenses at the same time. When you are given CNC status, the IRS temporarily stops active collection efforts. It should be noted that this does not erase your debt and will not get you current on your taxes. It just protects you from collection efforts until you are in a better financial position.
Which of these is right for you will depend on your financial situation and the amount you owe. However, there is one more option that is often best for people who owe a moderate amount and have a stable income. This is the installment agreement.
Consider an IRS Installment Agreement
An IRS installment agreement is a formal payment plan that allows you to pay off your tax debt in scheduled monthly installments over an extended period of time. For most people, this is much more realistic than paying it all at once. You can apply for a tax installment agreement by phone, mail, or online. It may be in your best interest to have a tax professional negotiate with the IRS on your behalf. They will be able to help you get an installment agreement that you can easily pay without financially burdening yourself.
Staying Current After Resolving Your Tax Debt
After resolving your tax debt, it is extremely important that you stay current on your taxes in the future. You should not make a habit of falling behind on your taxes. You should:
● Establish a system for tracking tax obligations
● Set aside money for future tax bills
● Review withholding or estimated payments periodically
● Keep tax records organized
● Address new tax problems promptly
Doing these things will help ensure that you never fall behind on your taxes again.
Share this:
Like this: