Managing Tax Debt: What to Do If You Owe The IRS
May 6, 2023
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Dealing with taxes is an inevitable part of life for most individuals and businesses. While the process of filing taxes can be straightforward for some, this filing season was particularly difficult for others who may have found themselves in a situation where they owe money on their federal tax return. This can happen for various reasons, such as underestimating tax liability, rapid growth in income, unexpected life events, or errors in tax preparation.
If you find yourself in this situation, it's essential to take action to manage your tax debt. Ignoring the issue can result in interest and penalties accruing over time, which can make the debt even more challenging to handle. Fortunately, there are several options available to help you deal with tax debt and get back on track financially.
Option 1: Set up a payment plan with the IRS
The IRS offers several payment plan options to taxpayers who owe money on their federal tax return. The most common option is a monthly installment agreement, which allows you to pay off your tax debt over time. You can request an installment agreement online, by phone, or by filling out Form 9465.
When setting up an installment agreement, you will need to choose a monthly payment amount that fits within your budget. The IRS will also charge interest and penalties on your unpaid balance, so keep in mind that the longer it takes you to pay off your tax debt, the more you will owe in total.
If you owe less than $50,000 in tax debt, you can usually set up an installment agreement without having to provide financial documentation to the IRS. However, if you owe more than $50,000, you may need to provide financial information to the IRS in order to set up an installment agreement.
It's important to note that if you miss a payment or fail to pay your tax debt in full, the IRS may take enforcement actions against you, such as garnishing your wages or seizing your assets. So, make sure you stay current with your payment plan to avoid these consequences.
Option 2: Request an “Offer In Compromise”
If you're unable to pay off your tax debt in full, you may be able to settle your debt with the IRS through an Offer In Compromise (OIC). An OIC is an agreement between you and the IRS that allows you to settle your tax debt for less than the full amount owed.
To be eligible for an OIC, you must meet certain qualifications, including:
· You must have filed all required tax returns
· You must have received a bill for at least one tax debt included in your offer
· You must not be in an open bankruptcy proceeding
If you meet these qualifications, you can submit an OIC to the IRS using Form 656. When submitting an OIC, you will need to provide detailed financial information to the IRS, including your income, expenses, and assets.
The IRS will review your OIC to determine whether it is in the best interest of the government to accept your offer. If your OIC is accepted, you will need to pay the settlement amount in full within a specified timeframe.
Keep in mind that the OIC process can be lengthy and complicated, and the IRS only accepts a small percentage of OIC requests. So, it's important to work with a tax professional who can help you navigate the process and increase your chances of success.
Option 3: Seek professional tax help
If you're struggling with tax debt, seeking professional tax help can be a smart move. An experienced tax professional can review your return for errors and may discover discrepancies or omissions that could reduce or eliminate your balance. If they determine that you indeed owe, a tax professional can help you manage your tax debt and develop a plan for paying it off. They can also help you with tax planning and financial planning to reduce your tax burden in the future. For small business owners and entrepreneurs, tax professionals can provide bookkeeping, payroll, tax compliance and audit assistance, and QuickBooks consulting to help you stay on top of your finances and avoid tax problems in the future.
When choosing a tax professional, make sure you work with a reputable firm with experienced professionals. Look for firms with positive reviews and testimonials from previous clients, and check to see if they have tax related credentials such as CPA, EA, or AFSP, tax certifications, and/or affiliations with professional tax organizations, such as the National Association of Tax Professionals (NATP).
If you owe money on your federal tax return, it's important to take action as soon as possible. The longer you wait, the more interest and penalties you will owe. Consider these options for managing your tax debt and seek professional help if necessary to ensure you find the best solution for your unique financial situation.
At Queen Tax & Financial Services, we understand that dealing with tax debt can be overwhelming. That's why we offer a variety of tax and accounting services to help individuals and small business owners manage their finances and minimize their tax burden. Our services include tax preparation services, accounting services, bookkeeping services, tax planning, financial planning, small business accounting, payroll services, IRS representation, tax compliance, tax return filing, tax audit assistance, and QuickBooks consulting.
Our boutique virtual firm is dedicated to providing personalized attention and tailored solutions to meet your unique needs. We work with you one-on-one to develop a comprehensive plan for managing your tax debt and achieving your financial goals. Schedule a free consultation today to learn more about how we can help you resolve your tax debt and assist you with your future tax and accounting needs.