Taxpayers who owe money to the IRS often panic and consider filing bankruptcy, negotiating an Offer in Compromise (OIC), or selling their house to pay the tax bill. According to the IRS, the huge majority of people who owe back taxes are on the hook for less than $5,000. Only a small fraction, about 2 percent of those who owe, are in arrears for more than $10,000. But even if you owe ten grand or more, no matter your income level, what’s the best course of action? It’s almost never bankruptcy or an Offer in Compromise.
There are plenty of things you can do if you owe money to the IRS, and that goes for people who are behind by just a few hundred dollars or many thousands. Here’s a quick look at what you can do if you owe Uncle Sam a paltry sum, a bundle or anything in between.
Pay as Much as You Can, as Soon as Possible
Always pay as much of your tax bill, preferably all of it, at the time you file your return. This strategy minimizes the amount of interest, penalties and other fees associated with late payment of taxes due. It also demonstrates good faith on your part that you are willing to resolve your tax debt.
File on Time Even When You Can’t Pay a Dime
No matter how much of your tax bill you can pay, be sure to file on time. If you file in a timely fashion, you will avoid the hefty “late filing” penalty that the IRS imposes. There’s no reason to incur this penalty. Simply file your tax return when it’s due, include no payment, and get ready to make a payment arrangement when you hear back from the IRS in a few weeks. They’ll send you a “tax due” letter that shows the total amount owed. It will also include instructions for setting up a payment arrangement.
Use an Installment Agreement if Possible
If you own less than $10,000, OR can pay the IRS in full within three years, OR can prove to the IRS that you can’t pay what you owe right now, then you will almost certainly be allowed to set up an installment agreement. During the agreement, you will pay principal, interest and penalties over a three-year period. Payments are monthly and can either be deducted directly from your bank or sent through the mail. In more than 80 percent of all tax debt situations, installment agreements are the preferred option.
Bankruptcy and Offers in Compromise are a Last Resort
If you want to go the OIC or Bankruptcy route, understand that they are truly “last resort” options. A bankruptcy will only eliminate certain types of IRS debt. If you file a Chapter 13 bankruptcy, you can propose a plan to pay off any non-discharged tax debts over several years. Bankruptcy is an extreme solution to tax debt and will stay on your credit history for up to 10 years.
If you enter into an Offer in Compromise with the IRS, you’ll have to pay at least what your net worth is calculated to be. That means you’ll be forking over virtually everything you have, namely your net worth minus any debt. Again, it’s an extreme solution that usually is not a good idea for the majority of taxpayers.
