Paying your federal income tax debt can be challenging during a recession. There are many factors that can lead to paying late or not paying at all, including unemployment, underemployment, secured debts, payday loans and ballooning credit card interest rates. Tax debt is different. If you do not pay taxes, you face property liens, garnished wages and potentially jail time in the case of fraud. There are options to help with this challenge.
Communication
You must communicate with the Internal Revenue Service. You must continue to file taxes yearly even if you can't afford to pay the tax debt. If you fail to file taxes, you subject yourself to a fine of 5 percent per month up to a total of 25 percent. If you fail to pay your taxes, but you did file them, the penalty is only between 0.5 and 1 percent per month. Use Form 4868 to request to file an extension when filing. The IRS may grant the extension of up to six months with late penalties.
IRS Payment Options
You can arrange payment options with the IRS to pay off your bill. The IRS will typically offer a 36-month payment plan at 5 percent interest with an initial start-up fee of $105, or $52 if debited monthly from your account. You will also continue to pay the up-to-1 percent monthly fee for not paying in full by the tax deadline in addition to the 5 percent interest rate. This interest rate is considered variable and can change quarterly as national interest rates vary. To request this option call 1-800-829-1040 or download a Form 9465 from the Internal Revenue Service website.
Optional Payment Methods
Consider any available payment option. You can pay tax debt by credit card. Compare the interest rate of your credit card with the repayment option that includes monthly and start-up fees. Consider mileage or other rewards paid by your credit card. Remember that a credit card is unsecured debt that, if you pay late, hurts your credit but will not lead to property liens. Consider loans against your retirement account or home equity. While none of these options is ideal, failure to pay taxes often holds higher sanctions.
Offer in Compromise
You can apply for an Offer in Compromise to settle your debt with the IRS. The IRS may accept an OIC in one of three cases: if the IRS doubts that the debt will be collected; if the IRS is unsure of the validity of the tax bill or if they allow for an "Effective Tax Administration" provision. This means they know the bill is correct and you can potentially pay, but paying would cause financial hardship that is "unfair and inequitable." Complete Form 656 and pay the $150 application fee to begin this process.
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