What Are My Options When I Can’t Pay My Taxes?

March 29, 2012 by  Filed under: Taxes 

When you don’t pay your taxes by April 15th you will receive a letter from the IRS asking you to pay your taxes. You will receive a “Notice of Taxes Due and Demand for Payment.” This notice will tell you exactly how much you owe as taxes and what the interest and penalties are that are charged for nonpayment on time.

If you have not paid your taxes because you disagree with the amount you have to pay, or if you don’t agree with the amount that is mentioned in the notice, contact the telephone number mentioned there immediately. The more you delay, the more the interest and penalty you have to pay. If you do not respond to this notice you will receive another which will not only remind you to pay but will tell you the consequences of nonpayment, such as the IRS putting a lien on any of your assets, or a levy on them including your bank account which is just another way to say that they will seize it. If you ignore this notice too, a debt collector will get in touch with you to collect what you owe. He will be very persistent in trying to get you to pay because he gets as much as 20% of what he collects from you as commission.

Set Up an Installment Plan

One of the options open to you is to set up an installment plan to pay what you owe. Depending on your past history in paying your taxes, the IRS may or may not agree to an installment plan. An installment plan is basically telling the IRS that you cannot pay what you owe on one lump sum and that you will pay it in installments.

There are a few eligibility criteria for this, and we will discuss what these are now.

Making an Offer in Compromise

In very rare cases the IRS will accept less than what it owes from you. In such an instance you make the IRS an Offer in Compromise asking them to settle with you for less than what you owe. Getting this concession from the IRS however is not impossible and hoping to settle for less is really not something that you should be hoping to do.

Filing for Bankruptcy

This is the last option that is open to you. If you are really unable to pay what you owe to the taxman, you can file for bankruptcy, but you must do this before the IRS puts a lien on any of your assets. Yet filing for bankruptcy does not let you off the hook. The money that you owe will continue to remain in their records and once you come out of bankruptcy the IRS will come behind you to pay what you owe. In a Chapter 13 reorganization bankruptcy this will happen after 5 years so you need to keep this in mind when you file. You basically have only three options when it comes to not paying your taxes on time, we now discuss in detail your options when you opt for paying your tax through an installment plan.

Installment Plan

If you are not able to pay your taxes in one lump sum you can contact the IRS to set up an installment plan for you so that you can pay what you owe in installments. The IRS do this only if you have filed your tax returns for the previous years without fail and on time.

Also there are three different categories that you will fall under when you ask the IRS for this option, if your tax is less than 10,000, if your tax amount is more than $10,000 but less than $25,000 and if your tax is more than $25,000.

The first step however is for you to fill out the “Installment Agreement Request” number 9465. In this form there are a few things that you need to intimate, like;

How much you can pay towards the installment every month. The best case scenario is that you can complete your payments before the next year’s tax comes due. If however you miss any of these payments, the IRS will cancel your plan and take the steps to collect the whole money from you.

You should also mention how you want this payment to be made. The easiest way to do this is to set up and auto debit from your bank account. That way your monthly payments will automatically be deducted from your bank. You however also have the options of making the payments yourself every month. The IRS usually takes up to 30 days to let you know if your installment plan has been approved or not. Sometimes they may ask you for further details before approving your request. If your plan has been approved, you will have to pay the amount of $43 towards set up cost. This amount will be deducted from your first plan payment.

This approval that is granted is however subject to two preconditions; that you make every monthly payment in full and on time and that you file your income tax returns correctly for all the years that the plan is in effect. If you break any of these two preconditions, the IRS will cancel your plan and proceed to collect directly from you.

Any installment plan is subject which category the amount of tax that is due falls in. each of these categories has different rules governing them and we will take a look at each one of them below.

1. If your tax is below $10,000 2. This is the easiest category that you can fall in. In most cases the IRS will automatically grant you your request if you satisfy the below conditions. 3. If you convince the IRS that you cannot pay your tax amount in one lump sum. 4. If you have filed your tax returns or at least the extension requests on time for the past 5 years. 5. If you have paid all your tax dues on time in the 5 years. 6. If the total amount due as tax is not so large that it will take more than 3 years for you to pay it back.

If you meet all the above criteria and your tax is less than $10,000 getting an installment plan from the IRS is not a big problem. They will automatically grant you your request, and the only way you will not get this plan is if you do not meet any of the above criteria. Next, we will discuss the other two categories that you can fall under, between $10,000 and $25,000 and over $25,000 taxes.

We will discuss what the other two categories are that you can fall under if you want to apply for an installment plan to pay your taxes.

If Your Tax Amount is $10,000 > $25,000

If the amount of tax you have to pay is more than $10,000 but less than $25,000, there is not guarantee that the IRS will approve an installment plan. If however you meet the required criteria they may grant you your request. The criteria is the same as for taxes below $10,000 as in; you should have paid your taxes on time in the preceding 5 yrs, and you should have filed your tax returns or an extension request on time in the past years.

Also the amount that you propose to pay as monthly installments should be large enough so that you can finish paying what you owe within 5 yrs.

Even then there is no necessity that the IRS will grant you your request, although you do have a good chance if you do meet these criteria.

If your tax amount is greater than $25,000

The procedure if you want to pay your tax in installments if it is greater than $25,000 is vastly different from if it were less. In previous cases you put forward how much you feel you can pay as monthly installments. In this scenario, the IRS calculates what it thinks you can pay monthly. Unfortunately the guideline values that the IRS uses may be very different from reality.

In this case you fill out one more form in addition to form 9465. It is form 433A or the “Collection Information Statement.” This statement has very intrusive questions about your financial position, and you will have to set down not only your monthly earnings, but the breakup of your expenses. For example you may have to give information such as how much you spend on food, on transport, on clothes, even cable, leisure activities and utilities.

The IRS has enough authority to get this information by itself, but it is more time consuming and by asking you to fill it out, is just trying to make its job easier. Also by filling out the form yourself, you are informing the IRS that you are really in a bad way and appreciate any help that they can give you. In any case if you have to pay more than $25,000 in tax you basically have no other choice than give this information.

The IRS uses the information that you provided for two purposes. One is to calculate how much it thinks you can pay every month, and the other is to get as many details as possible about your income and assets to be able to collect the money from you easily in case you default on the payment plan.

The problem with this is that when the IRS calculates what you can pay, it only includes what it considers essential expenses and what it considers essential may be very different from what you consider essential.

For example, the IRS may not consider cable tv to be essential and will not include this expense in its calculation. Also it always uses its guideline values when calculating even its essential expenses. This means that if you say you spend $400 per month on food and the guideline value for the IRS is only $350, it will take $350 as the expense for food per month for you.

At the end you will find that your calculation of how much you feel you can pay, and how much the IRS thinks you can pay are vastly different. You may be able to persuade the IRS that their calculation does not refletc reality, but this is more wishful thinking than anything else. Unless therefore you are willing to make very drastic changes to your standard of living, getting the IRS to agree to what you think is a reasonable payment amount is not going to happen.

About the only thing you can do is dispose of a debt, take a loan to pay of what you owe, or file for bankruptcy. Each of these options also have their negatives and we have discussed them all in previous pages. Tax is serious business and you really don’t have much options when it comes to paying it.

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