Losing Sleep Over Owing
The IRS?
Every year as April 15 approaches, I hear from people who are losing
sleep knowing they will not have the funds to pay the balance of taxes
due IRS. Can you imagine a more formidable creditor?
If you find yourself in that situation, here are some considerations to help you face the adversity and make the best decision:
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The problem will not disappear until you deal with it. Start making plans to pay the tax, even before you file the return.
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Don’t fail to file the return. While your instinct might be to delay filing to give yourself more time to obtain the needed funds, the penalties associated with owing IRS are far more punitive if you fail to timely file the return. Not filing on time or not asking for an extension for filing the return results in a combined penalty of 5 percent (4.5% late filing, 0.5% late payment) for each month, or part of a month, that your return is late, up to 25%. Filing on time, without payment ,carries a penalty of only 0.5% per month while the tax is unpaid.
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Here’s how the initial steps in the IRS collection process work:
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The tax is assessed and becomes collectible at the time your return is processed by IRS. Over several weeks, the agency sends a sequence of notices.
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The first is a Notice of Tax Due and Demand for Payment. If this is the first time you’ve had a problem paying IRS what you owe, that notice may include an invitation to set up an installment payment plan. The IRS charges a fee for providing that service.
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After 4-5 weeks, if you fail to respond to the first notice, you will receive a more strongly worded letter detailing IRS’ right to file a Notice of Federal Tax Lien.
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And 4-5 weeks later you will receive a last warning before the account is considered officially delinquent and IRS begins enforced collection actions. The failure to pay penalty will increase to 1% per month
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Consider your options: If you only need a 30 to 90 day delay to obtain the required funds for payment, IRS customer service representatives (at the phone number on the notice you receive) can help you. They are authorized to grant a delay of up to 120 days if you make a request and provide a credible basis for obtaining a delay.
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If you owe $25,000 or less in combined tax, penalties and interest, you can request an installment agreement using the Online Payment Agreement application at www.irs.gov. Or you can complete and mail IRS Form 9465, Installment Agreement Request, at the time you file your return or when you receive a bill from IRS.
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The current interest rate charged by IRS is at an annual rate of 4%, but is subject to change quarterly. In addition, the late payment penalty mentioned above of one-half of one percent of the tax (0.5%) is applied for each month, or part of a month the balance is not paid. Compare this combined rate of approximately 10% annually to what you would pay other lenders. As an incentive, IRS reduces the late payment penalty to 0.25% per month if you enter into an installment payment plan.
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If you also owe your state tax agency, compare its interest, penalties and collection techniques to help you determine whom to pay first.
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Since most people would not want to have IRS as a creditor, you might prefer to borrow from friends, use your home equity line of credit (the interest may or may not be deductible), or choose to pay taxes by credit or debit card.
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If the amount you owe is greater than $25,000, or the thought of negotiating with IRS is even more daunting than owing the money, contact a qualified tax professional specializes in taxpayer representation to assist you. Avoid those radio and late-night TV promotions that promise tax relief. The money you put in those services pockets would often better serve you by going directly to IRS.
