- What are dividends and how are they taxed?
- What is the basis of property acquired by gift?
- What is the generation-skipping transfer tax?
- Is an early distribution from a retirement plan taxed?
- How is the gain or loss on the sale or transfer of a capital asset determined?
- What are the tax consequences of the sale of a principle residence?
- What are the rules for deducting home office expenses?
- Do I have to pay US income tax on money I earned in a foreign country?
- What are the reporting requirements for businesses with respect to independent contractors?
- Are any taxpayers exempt from paying property taxes?
What Happens if I Cannot Pay My Taxes?
If you are unable to pay your taxes and fail to pay when you file, the Internal Revenue Service (IRS) will send you a bill, which begins the collection process. The bill will set forth how much you owe, including penalties and unpaid interest, and require payment in full. If you cannot pay in full, it is a good idea to pay as much as you can, as any unpaid amount will continue to accrue interest and be subject to a monthly late payment fee. In addition, it is recommended that you contact the IRS and attempt to make payments voluntarily. If you do not do this, the IRS may take certain actions to collect the unpaid taxes, such as: filing a notice of federal tax lien, serving a notice of levy or offsetting a refund to which you are entitled.
If you are experiencing a financial hardship and cannot pay anything, the IRS may temporarily stop collection efforts. In addition, if you can establish that paying a tax when due will cause you undue hardship, you can request a statutory extension of time to pay tax for up to 6 months. Undue hardship means substantial financial loss. To obtain this extension, you must file Form 1127 “Application for Extension of Time for Payment of Tax,” along with a list of assets and liabilities and an itemized list of money you received and spent for the three months before you asked for the extension.
Taxpayers who cannot pay in full may be able to arrange to pay in monthly installments. However, interest and late payment fees will continue to accrue. If you enter an installment agreement, there are several payment options, including direct deduction from your bank account, payroll deduction from your employer or payment via check or money order.
If you do not qualify for an installment payment agreement, you can propose an Offer in Compromise (OIC), which is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liability for less than what he or she owed. Generally, if you can pay the full amount owed with an installment agreement or other arrangement, you will not be eligible for an OIC.
Generally speaking, the IRS will only agree to an OIC if the amount you offer is more than the reasonable collection potential (RCP). The RCP gauges the taxpayer’s ability to pay. It includes the value of the taxpayer’s assets, such as cars, real property and bank accounts, and anticipated future income. There are three bases on which the IRS may accept an OIC: (1) there is doubt as to the taxpayer’s liability; (2) there is doubt that the amount owed by the taxpayer can be collected (i.e. it is doubtful that the taxpayer could pay the full amount); or (3) there is no doubt that the liability is accurate and that the full amount can be collected, but requiring full payment would create economic hardship or would be inequitable based on exceptional circumstances.
There is a $150 application fee for an OIC unless the offer is based only on doubt as to liability or you qualify for the low-income exception. You can pay the OIC in a lump sum or in installments. Lump sum is defined as payable in less than 5 installments; while a periodic payment offer is payable in 6 or more installments.
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