You try to file your taxes on time and probably assumed that you paid what you owed in full. However, some people make mistakes on their tax returns that can later come back to haunt them.
Under-reporting your income or underpaying your taxes could result in a massive debt owed to the Internal Revenue Service (IRS). What can you do when you owe money to the federal government and you don’t have enough money in your bank account to pay the balance owed in full?
The IRS does accept payment plans for tax debts
Once you know that you owe the IRS, you obviously want to tackle that debt as soon as possible. The debt accrues interest that can quickly add up to a substantial amount in addition to any penalties or interest assessed.
You can only pay as much as you have readily available in your budget. Once you know how much you can potentially pay toward your debt every month, you can then propose a payment plan. This is technically an installment with penalties payment arrangement.
The IRS will review and potentially accept your proposed payment plan, although you will likely continue to accrue interest on the amount owed until you pay in full. If you can pay the balance owed in under six months, there will be no fee for the payment plan. Otherwise, you will have to pay a fee in addition to the taxes owed and penalties and interest.
Offer in compromise is another option for resolving a tax debt obligation to the IRS. Basically, this involves making one or two lump-sum payments to the IRS in order to satisfy the tax debt owed but without paying the full amount of taxes owed. This can be a good compromise because both parties avoid expensive and time-consuming court battles, while resolving the tax issue amicably. A win-win.
Intentional compliance by suggesting payment plans can help you tackle your debt and will also reduce the likelihood of aggressive enforcement actions. Understanding your rights when you need a payment plan arrangement with the IRS can make tackling your tax debt a less intimidating process.