If you have a big tax bill that you can’t pay, life can seem pretty bleak
What makes it worse are the punishing penalties and interest the IRS charges a taxpayer when they either don’t file or don’t pay what is owed. The real kicker? IRS notices for penalties are next to impossible to decipher.
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Penalty Charges
There are two types of penalty charges. One for filing late and one for paying late. The total penalties for filing taxes late is usually 5% of the tax owed for each month, or part of a month, that your return is late up to five months (25%)
Late payment penalties are one–half of one percent (0.5%) of the actual tax owed for each month, or part of a month, that the tax remains unpaid from the due date, until the tax is paid in full. There is no maximum limit to the failure-to-pay penalty.
Interest Charges
The IRS will charge interest on late or unpaid taxes, regardless of cause. The period covered always begins with the original due date of the return, and ends with the receipt of payment by the IRS.
The interest rate on unpaid Federal tax is determined and posted every three months. It is the federal short–term interest rate plus 3 percent. Interest is compounded daily.
| Jan. 1, 2011 — Mar. 31, 2016 | 3% | |
| Apr. 1, 2016 — Jan. 31, 2017 | 3.7% | |
| Feb. 1, 2017 — Mar. 31, 2018 | 4.04% | |
| Apr. 1, 2018 — Dec. 31, 2018 | 5% | |
| Jan. 1, 2019 — Jun. 30, 2019 | 6% | |
| Jul. 1, 2019 –Jun 30, 2020 | 5% | |
| Jul. 1, 2020 –Present | 3% |
There are ways to reduce or even eliminate penalties and interest by requesting an Abatement of Penalties.
Typically the IRS will require that penalties and interest be paid in full before any abatement determination is made. Once you pay the bill, the ‘meter’ stops and you will not have additional interest charges accruing.
Negotiating the removal of penalties and interest is complicated but an experienced tax attorney or enrolled agent can help you quickly apply and get approved for abatement. To see if you qualify click here.
If you’re in this boat, however, it is not the end of the world. There are steps you can take to reduce the impact of unpaid taxes on your life, credit and financial well-being. Here are five tips to lessen that burden.
Tip 1: Don’t ignore the problem. The IRS will not. Even if you can’t pay what you owe, file your return on time or, if that’s not possible, file for an extension. The late filing penalty is 5 percent of the tax owed per month up to a maximum of 25 percent of the balance. There is also an underpayment penalty of 0.5 percent to 1 percent per month of the balance owed, also up to 25 percent. If you don’t file your return or make any payment on your obligation, your tax debt will grow rapidly.
Tip 2: Be realistic about your situation. The IRS rarely forgives tax debts. Form 656 is the application for an “offer in compromise” to settle your tax liability for less than what you owe. Such deals are only given to people experiencing true financial hardship. If you or your family have had catastrophic health-care expenses or you’ve lost your job and have poor prospects for generating income in the future, you may qualify. It doesn’t happen often.
You can greatly enhance your chance of a settlement by using an experienced tax attorney or enrolled agent. These tax professionals know exactly how to present your case and how best to negotiate with an IRS examiner.
Visit this link to get referred to the Nation’s best tax professionals.
“Tax forgiveness is intended for people truly struggling with a tax burden,” said Michael McKeon , CEO of SoNerdly, a financial services comparison website for consumers
Tip 3: Owe less than $7,000? Handle it yourself. How big is the balance? If it’s less than $7,000, you’re probably capable of handling the matter yourself rather than paying someone to help you deal with the IRS. Form 9465, the IRS application for an installment payment plan, can be filed online. The plans typically allow you to pay off the balance owed plus penalties and interest over a 36-month period.
With anything larger, it may be worth to hire a professional.
Tip 4: Owe more than $7,000? Hire an attorney. If you owe more than $7,000, consider hiring a tax attorney to negotiate with the IRS. Payment plans differ, and an experienced attorney can help you get better terms. They can also help you avoid having a tax lien being assessed against you, which will damage your credit.
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Be careful whom you hire, however. State attorneys general warn consumers regularly about tax-debt resolution scams. Make sure you are working with an actual tax attorney or enrolled agent.
Consult a resource such as the SoNerdly website, which allows consumers to compare the offers, rates and fees of tax-relief companies and provides some background on firms’ experience and things like the number of licensed attorneys on staff.
“Knowing many of these attorneys, they can provide a lot of value,” said McKeon, who formerly worked for TaxRise, a major company in the industry. “But people have to do their research and explore their options.”
A big tax bill can feel like a financially and emotionally crushing burden. There is only one way to deal with it: Face the situation honestly, and develop a budget you can handle to pay it off.
“If you have a tax liability you can’t afford to pay, don’t avoid the issue,” said McKeon. “You can work with the IRS to deal with it.”