IRS back taxes are no joke.
Find out how to avoid them.

First, as the Hippocratic oath would state, do no harm (to yourself). The least palatable option you would have is to do nothing. Do not avoid the problem.  We can assure you that IRS back taxes will not go away. If you owe taxes and you are unable to pay them when due, you would face penalties and interest. Certainly, this would compound your problem.

Many people make the assumption that it does not make sense to file a return if they do not have the funds to pay their tax bill. But the best course of action would be to file your return or file an extension to avoid the Failure to File Penalty. This penalty could be quite costly: .5% of the unpaid balance, per month or part thereof, up to a maximum of 25% of the unpaid balance. In addition, the interest rate for unpaid or underpaid taxes is currently 6%. However, it can change quarterly.

You might be asking “what are your options?”.  There are several options available depending on the specifics of your situation:

  1. Request a short-term extension to pay the full balance.

The IRS would grant up to 120 days to taxpayers to pay their full balance. However, there is the previously mentioned penalty of .5% per month on the unpaid balance. You will also have to pay interest at the short-term federal rate plus 3%. With this option, you avoid the installment payment application fee. To do this you can call the IRS or get a tax professional to handle it for you.

 

     2.    Set up an installment agreement with the IRS.

       The type of agreement you get would depend on your individual situation. But a good rule of thumb to follow is: you should not set up an installment agreement if you can pay the balance within 120 days.  This option has additional fees. The online payment agreement would cost the applicant $149. If payments are made electronically the fee is $31. For low-income taxpayers, the fee is $43.

If you set up an installment the penalty on your unpaid balance would be .25% per month. Interest would also be levied at the short-term federal rate plus 3%. One caveat: if you are late with your payments the IRS can void the agreement.

 

     3.  Apply for a hardship extension to pay taxes.

         The IRS makes provisions for those who find themselves in hardship situations, including currently not collectible status and the offer in compromise. To get the extension based on hardship, you will have to prove that paying the taxes that you owe would cause financial hardship, based on IRS financial standards.

There is no fee to apply for a hardship extension. Also, there is no penalty. However, interest is charged at the short-term federal rate plus 3%. To take this route you would have to file IRS Form 1127. You would be required to include a statement of your assets and liabilities.

 

4. Borrow from your 401(k), 403(b) Plan.

          Some plans may not allow you to withdraw money prematurely, so you may have to check with your plan administrator. If your plan allows you to borrow money, you must repay the money within five years. Generally, you would not be able to borrow more than 50% of the balance, with a $50,000 maximum.

There is, generally, no fee but the plan has to charge you interest. A loan from your qualified retirement plan can be an inexpensive option to pay your back taxes. However, if you don’t repay the loan it could have a seriously negative impact on your retirement plan. Any unpaid amounts are a taxable distribution. Additionally, if you are not yet 59 ½ years old you would be subject to a 10% penalty for early distribution.

The preceding options are the most common ways taxpayers may use to redress their situations.  There are a couple of others such as using credit cards or borrowing from friends, which we don’t recommend because of the possible negative consequences of doing so. They should only be used as a last resort. If you find yourself in the situation under discussion it would be helpful to reach out to a tax professional. They would be able to help you navigate the pathway towards redressing your issue.

 

If you have a concern about your IRS back taxes, call us today for a free consultation!