With the holiday season in the rearview mirror, we are all getting back into our normal routines. Unfortunately, that means starting to think about tax season 2012. April is right around the corner, after all, and if you foresee an inability to pay your full tax bill in full, this can be quite disconcerting. To help ease concerns, the California Society of CPAs recently announced some important strategies for dealing with the Internal Revenue Service (IRS) if you cannot cover your total tax toll.
Before we get to them, however, there are a few things that you need to know about the IRS, its practices, and the terminology you can expect to come across when dealing with an inability to pay:
- Paying the IRS should be your top financial priority: According to the California Society of CPAs, paying your tax bill should be a higher priority than basically every other financial obligation, aside from subsistence, of course.
- You must not underestimate the IRS: You need to realize just how powerful the IRS is. You’re not going to slip through the cracks when it comes to paying your tax bill, so you might as well accept that now. In addition, it’s important to note if you do not pay your taxes on time and in full, the IRS may be able to file a notice of tax lien against you (which could damage your credit standing), garnish your wages, or even prosecute you for willful failure to file.
- “Substitute for a Tax Return:” When people don’t file tax returns, the IRS may independently determine their tax liability itself, in what’s known as a substitute for a tax return. This substitute tends to be far higher than what’s actually owed.
- “Offer in Compromise:” This is when the IRS agrees to accept payment that is less than what a citizen owes. You certainly shouldn’t count on reaching this type of agreement, as the IRS isn’t known for generosity and understanding, but it’s something you should be aware of.
Now that you’ve got the requisite foundation of knowledge, we can progress to the CalCPA’s 5 strategies for tax season 2012:
1. Always file a return: Much like you should always submit at least a monthly payment to your credit card company in order to avoid the onset or worsening of delinquency, you should always file a tax return. It’s natural for people to try to hide from problems, but if you don’t file, the IRS will assess penalty fees, ranging from 5% of your outstanding balance each month to 25% of the total amount due.
2. Scrape together all available funds: Given the importance of paying your taxes and the negative repercussions associated with not doing so, it’s important to leave no stone unturned when it comes to coming up with the money to pay. That means not only reviewing your bank accounts, but also scouring under couch cushions, seeking help from loved ones, collecting on old IOUs, or even taking out a home equity line of credit.
It also bears mentioning how useful a 0% credit card can be in this regard. The IRS accepts credit card payments through designated third-party processors, and even though you will have to pay a 2.5% service charge, using a 0% credit card can both help you pay your tax bill on time and avoid interest in doing so. Depending on your credit standing and the offers available at the time you apply, this type of credit can give you up to 21 months to pay down your balance interest-free.
3. Consider partial payments or installments: It’s worth a shot to try to broach the idea of an installment plan or partial payment with the IRS. However, as is the case when faced with an inability to pay your credit card bills, you must take the initiative in doing so and only agree to pay what you can afford. If you owe less than $25,000 in taxes, fees, and interest, you can apply for an installment plan online. If your tab is higher, you’ll have to provide substantial documentation, given that the IRS will consider your income, living expenses, transportation costs, and other monthly obligations in evaluating your request and determining the payments you will be required to make.
4. Apply for an Offer in Compromise: If you cannot pay your full tax bill or will experience hardship as a result of doing so, and you can afford to make a substantial lump-sum payment, you can petition the IRS to accept a lesser amount.
5. Don’t try to hide: As alluded to earlier, the IRS’ reach is extensive. Therefore, even if you are classified as “currently not collectible” and years pass by, you still can’t assume you’re off the agency’s radar. In fact, you can expect to receive a bill if your income increases or you otherwise come into some cash.
With these things in mind, you will undoubtedly be much more prepared for tax season and any related dealings with the IRS. Besides, you’ll be hard pressed to find a better New Year’s Resolution than getting the IRS off your back. WH00000018