The U.S. tax system is a pay as you go system. Those who have an employer will notice that taxes are taken out of their paychecks. The Internal Revenue Service (IRS) expects those who own their own business or work as contractors to make payments as well, generally on a quarterly basis.
At the end of the year, we gather all our paperwork and complete our annual tax filings, generally due before April 15 of the next tax year.
Although this is ideal, there are extenuating circumstances that can mean an individual or business has not paid their tax obligations for multiple years. Depending on the particulars of the situation, this can quickly add up to a high tax bill. As if the tax bill on its own was not daunting enough, the IRS is likely to add late penalties, interest, and other fees as the months go by and you fail to pay the bill.
With all these fees, it is no surprise that a tax bill can quickly add up and a taxpayer can find themselves owing the IRS a tax debt in the tens or even hundreds of thousands. If you find yourself in this situation, take a breath and know that you are not alone. With a couple of steps, you can move forward and get yourself headed in the right direction.
Step 1: Review your filings.
Make sure you are up to date on your tax filings. If not, consider updating or amending inaccurate tax filings from previous years.
It is generally a good idea to seek legal counsel at this stage. Depending on the details of the reasons for the failure to file tax returns the government could try to argue that you attempted to avoid your tax obligations. This could escalate to an accusation of criminal wrongdoing, like tax evasion, which can come with serious penalties. An attorney can review your situation and discuss your options to help you reduce the risk of potential imprisonment.
Step 2: Consider options for repayment.
The IRS wants you to pay your taxes. They recognize that in some cases it is best to take the funds in smaller payments with one of the many available payment plan arrangements or even to accept a lower amount than actually due, called an offer in compromise. It is important to review all the options to find the right one for your situation.
Once you find the right option and fill out the necessary paperwork it is important to follow through with the agreement. Sticking to the agreed upon plan can get you back on your feet and focused on future financial stability without having to worry about an outstanding debt to Uncle Sam.