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You have completed your tax return and done your best to eliminate your tax liability. However, you still owe money to the Internal Revenue Service — and you don’t have enough funds to pay Uncle Sam. What are your options?
A lot of people who owe money to the IRS think they can file an extension and pay their taxes at a later date. However, your taxes are due April 15. An extension is only an extension of time to file — it is not an extension of time to pay. An extension, in other words, will stop the IRS from charging you a failure-to-file penalty, but your taxes are due by midnight April 15. If you owe money, you are supposed to calculate the amount you owe, and pay it with your extension.
Luckily, you have some options if you can’t pay the IRS in full. For example, you can pay in installments by filling out Form 9465, which gives you up to 72 months to pay your taxes. However, when you file this form you are making a deal with the IRS — or a deal with the devil, depending on how you look at it. The IRS has 10 years from the date that a tax is assessed to collect the money that is owed. This is known as the statute of limitations. If you ask to pay in installments, this adds two years to the statute of limitations.
In addition, by using this option you are agreeing that when you file your next return, you will file on time, and pay any taxes that are due. If you don’t, it will nullify your installment arrangement, and the IRS will aggressively pursue the balance owed. Penalties and interest will be tacked on to the amount. Interest accrues daily, and the penalties are pretty high. Given all these facts, it’s a good idea to pay the amount that you owe the IRS as soon as possible.
If you owe a lot and don’t have many assets, another option is to ask for an Offer in Compromise. An Offer in Compromise means you pay less money than you owe in conjunction with the IRS compromising on the debt. For instance, if you owe $25,000 but have no assets and no ability to pay the full amount, you can offer the IRS a reduced amount. About 18% of all such offers filed are accepted.
Keep in mind that in order to file an Offer in Compromise, you have to give up a lot of personal information, including bank account numbers, retirement plan information and information about all of your assets. Filing an Offer in Compromise will extend the statute of limitations by the time that the offer was pending, plus 30 days. The IRS typically takes six to 12 months to investigate an offer.
Unless you owe payroll taxes, nobody will put you in jail for not paying income taxes. However, owing the Internal Revenue Service is not pretty. The penalties are steep, and the interest is compounded daily. Like getting a loan from the Mafia, owing money to the IRS means you have to pay up. You won’t forget about the debt, and you can be sure it won’t either.