Question of the Week
What To Do If You Owe The IRS And Can’t Pay
Happy Friday, all!
We’re in the home stretch for this first tax deadline, and I’m excited to see the light at the end of the tunnel. A few of you have come to me with some stress and anxiety about owing more than you can pay. That’s okay.
If you find yourself with income-tax debt, you aren’t alone. According to the U.S. Internal Revenue Service (IRS) Delinquent Collections Activities Databook, over 8 million Americans owed over $114 billion in back taxes, penalties, and interest in 2020.
The good news is there are plenty of ways to resolve your tax debt. Here are the four most common:
1. Online Payment Agreements
Under the IRS’ Fresh Start initiative, individuals who owe $50,000 or less in income tax and businesses that owe $25,000 or less in payroll tax may qualify for an Online Payment Agreement. You can set up the payment for any amount you can afford as long as you pay the debt within 72 months (6 years). You can also modify installment agreements through the program.
You may qualify to apply online for either of two types of plans:
- Long-term payment plan (installment agreement): You owe $50,000 or less in assessed tax, penalties, and interest and filed all required returns.
- Short-term payment plan (paying in 120 days or less): You owe less than $100,000 in combined tax, penalties, and interest.
If you are a sole proprietor or independent contractor, you can apply for a payment plan as an individual. However, there will be some application fees: $31 to apply online and pay through automatic withdrawals or $149 to apply online and pay through another method (the IRS reduces the costs for low-income applicants).
2. Installment agreements
If you need longer than 72 months to pay your debt or owe more than $50,000, the IRS will request a Collection Information Statement (Form 433-A, Form 433-B, or Form 433-F). These forms provide an in-depth analysis of your assets and your income and expenses to help determine what you can pay monthly. For example, if the financial statement shows that you can only afford $400 a month after you’ve paid your necessary expenses, that will be the amount of your installment agreement. These financial statements also play an essential role in the other resolutions you may obtain.
You can request the agreement by phone or mailing Form 9465 to a service center. Be prepared for delays. Service centers are behind in processing installment agreements. The IRS is currently working to reopen its offices due to Covid-19 restrictions. Check IRS operations and services for the most up-to-date status.
Also, keep in mind that interest and late-payment penalties continue to accrue on any unpaid taxes. However, the IRS halves the penalty assessed for failure to pay taxes, while an installment agreement reduces it from 0.5 percent per month to 0.25 percent. For the calendar quarter beginning January 1, 2022, the interest rate on underpaid taxes is three percent.
Quote of the Week
“A deadline is negative inspiration. Still, it’s better than no inspiration at all.” – Rita Mae Brown
Task of the Week
One last tip: don’t forget you still have a chance to reduce your tax bill. If you qualify, you can contribute to a traditional IRA and an HSA. You reduce your taxable income by $6,000 (or $7,000 if you’re 50 or older) by maxing out a traditional IRA. You can reduce your income by $7,200 if you have a family HSA or $3,650 if you have an individual plan. In addition, you can add $1000 to your HSA contributions if you’re 55 over. Depending on your marginal tax bracket, this can save you a couple of thousand dollars.
Don’t be afraid to reach out to your tax professional if you need help!