Story provided by Businessweek –
The IRS got more than 131 million tax returns last month. Was yours one of them? If you forgot, or didn’t file for some other reason, it’s a mistake to do nothing and hope the tax authorities look the other way. The IRS has gone after more than $30 billion in back taxes, penalties, and interest from delinquent taxpayers in the past two fiscal years.
“The amount you owe will only grow larger if you procrastinate,” says Mary Kay Foss, an accountant with Sweeney Kovar. “If you ignore your tax bill entirely, not only will interest and penalties accrue, but the IRS may go after your assets and wages as well.”
Here are five things you can do to get back on track with the IRS.
1. File a tax return, even if you can’t pay the money you owe. At least you’ll minimize the $195 per month failure-to-file penalty assessed by the IRS, even if you get hit by failure-to-pay penalties and interest. Burying your head in the sand could boost your tax bill by 25 percent or more by the time the authorities catch up with you, says Alan Pinck, an enrolled agent with A. Pinck and Associates. And it’s particularly crucial to file if you’re self-employed, he says, since you won’t get Social Security credits toward your retirement if you don’t report self-employment income within three years of the due date.
2. Pay as much of your tax liability as you can when you file your return. Then wait for the IRS to send you a bill for the remainder. This typically takes about 45 days, so save up during that time and again pay as much of the outstanding amount as you can. “By following this process, you can buy yourself some time,” Foss says, though you will still be accruing penalties and interest on your unpaid tax balance. The IRS sets up some limited installment agreements that allow taxpayers to make monthly payments. If you owe both state and federal taxes, it’s best to pay your state taxes and then try to negotiate a payment plan or settlement with the feds to avoid dealing with two agencies at once.
3. Borrow money to pay your bill. “By paying the bill in full, you’ll be able to avoid IRS penalties and interest. And you may not have to pay interest” if you can get a loan from a relative or friend, Foss notes. But even if you do have to pay interest on a loan, it will probably be less than the interest and penalties charged on unpaid tax. Alternatively, the IRS allows payments by credit card. This isn’t a good option if you can’t pay down high-interest credit card debt quickly, but you will avoid interest and penalties assessed by the IRS.
4. If you owe a lot of money, typically over several years, and don’t have the ability to pay, you can propose an “offer in compromise.” This is a negotiated settlement between you and the IRS where you may be able to pay less than the full amount you owe and still settle your bill. There’s a nonrefundable application fee to have your offer considered, and there’s a lot of paperwork, including various IRS forms, financial statements, pay stubs, and bank records. But if you’re successful, you will avoid severe collection actions, such as tax liens or garnished wages.
5. Figure out where you’re doing wrong and make changes so you won’t be in this position a year from now. If you’re self-employed, look into whether you should make quarterly tax payments throughout the year so you won’t end up with a large bill next April. If your spouse is employed, investigate adjusting his or her paycheck deductions. You’ll get less take-home pay that way, but you’re much less likely to owe a big chunk at tax time. And wouldn’t it be a relief to get a refund next year?