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What to do when You Can't Pay Your Taxes

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Not being able to pay your taxes is a daunting prospect. The situation can be overwhelming and certainly cause you to lose sleep. In recent weeks, I've had heart-to-heart conversations with two clients facing just this situation. The good news is, there are ways to solve this problem. Meet our first client, a budding entrepreneur who started a new business last year. As a fresh face in the world of business ownership, they didn't have the foresight about estimated taxes or saving up to cover their tax bill. Fortunately, they're in a position with decent cash flow, which opens the door to establishing an installment agreement. Then there's our second client, who hadn't filed taxes for several years and, a few years back, unexpectedly received a substantial inheritance. They wisely invested it, but life's twists and turns led them to spend it all before they could address their impending tax bill for years of capital gains. With a job offering limited hours and a modest hourly wage, they find themselves in a tight spot. However, considering their income and allowable expenses, they're an excellent candidate for an offer in compromise. These clients are being helped by valuable programs that fall under the IRS's Fresh Start Initiative, which encompasses various tax relief solutions to help you tackle your tax woes head-on. Among them are installment agreements, offers in compromise, tax lien withdrawals, and penalty abatement. Today, let's focus on how two of these IRS programs can come to your rescue.

1. Installment Agreements: Paying on Your Terms

Installment agreements are a lifeline when you can't pay your taxes in one lump sum. The key here is the ability to pay off your taxes over time, not all at once. For many, an online payment plan offers the convenience they need. This plan allows you to settle your outstanding tax balance gradually. The best part? You'll get immediate notification of approval without the need for phone calls or letters to the IRS. Online payment plans process faster than requests submitted with electronically filed tax returns, even if your new tax isn't assessed yet. There are two main types of online payment plans: Short-term payment plan: This option is for those with a payment period of 120 days or less and a total amount owed of less than $100,000 (tax, penalties, and interest combined). Long-term payment plan: If your payment period exceeds 120 days and your total owed is less than $50,000, this is your go-to option. But what if you don't qualify for the online plan? Don't fret; you can still secure an installment plan by completing and sending in form 9565. Keep in mind that penalties and interest continue to accrue each month, so it's advisable to choose the longest schedule possible to maintain flexibility and make the smallest payments while contributing more when you can.

2. Offer in Compromise: Negotiating a Fresh Start

Obtaining an offer in compromise may sound complex, but it's a viable solution if you can't pay your full tax liability, or doing so would create a significant financial hardship. The key here is demonstrating that you won't have the means to pay off your debt in the future. An offer in compromise allows you to settle your tax debt for less than the full amount owed. The IRS evaluates your unique financial circumstances, considering factors like your ability to pay, income, expenses, and assets. When it comes to expenses, the IRS uses standardized amounts for essentials like food, clothing, housing, and transportation, with some room for deviations if necessary. There's also the matter of paying something upfront with the application: Lump Sum Cash option: Submit an initial payment of 20% of the total offer amount with your application. If the IRS accepts your offer, you'll need to pay the remaining balance in five or fewer payments. Periodic Payment Offer option: This option allows you to pay in six or more monthly installments. While the IRS reviews your offer, you must continue making the installment payments as per the offer's terms. Owing money to the IRS can be intimidating, but here are two essential takeaways:
  • Firstly, there are options available to you, and only in rare circumstances does someone end up in jail for unpaid taxes.
  • Secondly, proactively work with the IRS or a tax professional to address your tax debt; ignoring it won't make it disappear, and the IRS prefers not to be kept waiting.
  • With the right approach, you can navigate your tax troubles with confidence and peace of mind.

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