What if you owe so much in taxes that you can’t see your way out of it?
If you owe back taxes, you might not think there is a way you can ever pay things off. And the more those back taxes have accumulated, the deeper the hole. But that doesn’t mean you can’t dig your way out!
With a bit of patience and planning, you can take care of your taxes and get the IRS off your back. Interested in knowing how? Keep reading to learn the answer!
What Happens If You Don’t Pay Back Taxes?
Our guide will help you discover the many different ways you can begin paying your back taxes. However, those who owe a lot of money in unpaid taxes often ask a simple question: what, exactly, would happen if they didn’t pay the taxes back at all?
In this situation, there is good news and bad news. The good news is that you aren’t facing any jail time for simply not being able to pay your taxes. The bad news is that the penalties will just keep adding up.
For example, a failure to file a penalty can add an additional 5% to whatever amount you owe. And this penalty stacks up each month until it is at a maximum of 25%.
Keep in mind that this is separate from the failure to pay the penalty. That starts at .5% per month until it, too, hits a maximum of 25%. And the interest rate on unpaid taxes means that you will effectively owe a little more each and every year until you pay.
Eventually, the IRS can garnish your wages and/or put liens on your property in an attempt to get money for your taxes. But you can avoid that situation by pursuing some of our strategies below.
Consider An Installment Plan With The IRS
Perhaps the easiest strategy for paying the taxes you owe is to request an installment plan with the IRS. If you can’t pay what you owe entirely, you can request a plan to pay everything off in simple installments until your tax debt is cleared.
As you might imagine, this strategy has several benefits. It is beneficial because by reaching an agreement with the IRS, you demonstrate a good faith attempt to pay your taxes and will likely avoid liens and wage garnishments. On top of that, you can reduce (but not eliminate) the penalties for unpaid balances, though you will still need to contend with a federal interest rate on unpaid taxes until you have paid everything back.
What kind of installment plans are available? Generally, there are short-term plans designed for those who can pay the taxes off in 180 days or less and long-term plans for those who need more than 120 days to pay off their taxes.
Under these plans, there is a maximum amount of combined tax, interest, and penalties you can owe. That maximum is $100,000 for the short-term plan and $50,000 for the long-term plan. But if you really want to reach a favorable installment plan agreement with the IRS, your best bet is to work with tax specialists who know exactly how the IRS examines these different cases (more on this in a minute).
Are There Any Downsides To An Installment Plan?
At first, glance, reaching an installment plan agreement with the IRS may sound like a great solution. But there are a few potential downsides you should be aware of.
First of all, even if you can reach an agreement, you are still going to pay interest and penalties. Second, if you should pay with a debit or credit card (which is fairly typical), you will be paying extra processing fees on every single payment.
Finally, those who owe more than $25,000 must-have installment payments taken directly from their bank account. This adds an extra level of convenience if you were hoping to use a different account or credit card.
This is one of many reasons you should consider working with a third-party financial specialist. Not only can they negotiate with the IRS on your behalf, but they can help you get better terms and ultimately reduce how much you have to pay back.
Requesting a Short-Term Extension
You may have noticed that the repayment plans involved some very specific time frames, and they are designed for those who need 120 days or more to pay off their taxes. But what if you need fewer than 120 days? In that case, your best bet is to apply for an extension with the IRS.
Generally speaking, this option works best for those who don’t owe that much in back taxes. So long as you can pay everything back in fewer than 120 days, you should be able to complete the online payment agreement and then contact the IRS to make the request.
Even if you are approved, you will still face penalties on the unpaid balance (typically .5% per month) as well as the current federal interest rate per month. But if you can pay all your taxes off in just a few months, there won’t be that much time for fees and penalties to accumulate.
Other Considerations Regarding the Short-Term Extension
On paper, the short-term extension may look very favorable. The penalties aren’t quite that bad, and everyone loves the idea of paying off what they owe sooner rather than later.
But the blunt truth is that most who owe taxes to the IRS cannot simply pay everything off in 120 days. Most of the time, if someone could pay off their text debt in that short a time, they wouldn’t have amassed much tax debt, to begin with.
And if you’re not careful, you might get a short-term extension approved and then be unable to pay everything off in less than 120 days. If that happens, you will be functionally back to square one and trying to figure out what to do about your taxes.
This is another reason we recommend contacting third-party tax specialists. By consulting with such a specialist, you can discover the best (and most realistic) repayment strategy for your own needs. And you get all the other benefits that come from working with those who understand the IRS inside and out, which may significantly reduce how much money you have to pay.
Apply For a Hardship Extension
What is the primary reason you haven’t paid the taxes you owe? For most individuals, the simple answer is that they didn’t have the money. All it takes is the sudden loss of a job, an unfortunate medical diagnosis, or another setback to completely disrupt your finances. And you can’t exactly pay the IRS back with money you don’t have!
Here’s some good news, though. In these situations, you can apply for a hardship extension. This may give you additional opportunities to pay what you owe by making an offer in compromise or requesting to be put in the currently not collectible status.
How does this work, though? We’ve got the details on how you can get started.
Pursue An Offer In Compromise
You might be surprised to learn that you don’t necessarily need to pay back every penny that you owe the IRS. It is possible to reach a deal and pay back an agreed amount that is less than the actual tax debt. But to do so, you need to pursue an offer in compromise.
When you apply to the IRS for this offer (which typically requires a $205 fee), there are certain conditions you should be aware of. For example, you can’t qualify if you are currently in bankruptcy proceedings, and you’ll need to be current on your tax returns. And it’s still possible for the IRS to put liens on you until you have paid everything back.
Perhaps the biggest hurdle, though, is the odds. Generally speaking, the IRS accepts fewer than half of the applications they receive for offers in compromise, preferring instead that you pursue an installment plan. But if you apply and are accepted, this could greatly reduce the overall amount of taxes that you owe to the government.
If you’d like to have your cake and eat it, too, start working with a tax specialist rather than contacting the IRS on your own. This increases your odds of the IRS accepting your offer, and once this happens, you can realize significant savings over the standard installment plan!
Pursue a Currently Not Collectible Status
While the IRS is not statistically likely to accept your offer in compromise, it’s still worth a shot. But depending on your situation, you may have far better odds at requesting to be placed in a currently not collectible status.
What this status means is that you are simply not financially capable of paying your taxes at this time due to hardship. When you apply, the IRS will want to examine your financial records to verify your inability to pay. And if you are approved, you will need to periodically provide more financial records to indicate that you are still incapable of paying the taxes back.
The most important thing you should know about this status is that it is temporary. It will not make your tax debt go away, and it’s still entirely possible for the government to put liens on you. So even if your status is approved, it’s important to develop a game plan for eventually paying off your back taxes.
One of the most annoying things about pursuing this status is that the IRS retains the right to examine your Collection Information Statement and determine if your finances are as bad as you claim. Rather than risk them rejecting your claims altogether, you should work with a tax specialist who can help you make the strongest possible case to the IRs about your collectible status.
Work With Tax Experts
Generally speaking, knowledge really is power. However, those who owe back taxes to the IRS quickly discover an unpleasant truth: the more you learn about tax debt and the IRS, the scarier it gets!
However, you don’t have to go through this situation by yourself. We recommend working with reliable tax experts to help you analyze your situation and develop the best way to pay off your debt.
What can a good tax expert help you with during this process? In a word, everything. For example, they can help you gather all of your paperwork related to tax documents and IRS paperwork and make sense of everything in front of you.
Furthermore, tax experts can help you gather the necessary paperwork and make your application for things like IRS repayment plans and hardship applications. And they can help you negotiate with the IRS in a way that reduces your chance of facing wage garnishments or liens.
And if you’re worried about the cost of working with a specialist, consider this: a good specialist can save you so much money that their assistance goes beyond paying for itself. It can potentially save you thousands and thousands of dollars and serve as an optimal financial solution.
At the end of the day, the simple truth is that dealing with the IRS and major tax debt can be a bit intimidating. And the best way to deal with everything is to have an expert on taxes and the IRS by your side.
Your Next Move
Now you know how to deal with your back taxes and the importance of hiring a tax expert. But do you know which experts you can rely on? Here at Polston Tax Resolution and Accounting, we specialize in helping clients just like you pay back what they owe. To discover how we can help get the IRS off your back, just contact us today!