If you owe the Internal Revenue Service money, the Service will catch up with you sooner or later. The IRS offers a few alternatives if you aren’t able to pay what you owe in full. Taxpayers typically have two options — an offer in compromise or an installment plan. While it’s best to ensure your taxes are paid on time to avoid any adverse consequences, these options can help you settle your tab.
Consequences for Failing to Pay Your Taxes on Time
The Internal Revenue Service can impose penalties on taxpayers who fail to meet their obligations. If you are charged a penalty, the IRS will inform you by mail and provide instructions concerning what to do next. Interest is also charged on penalties. Relief from these penalties can be requested over the phone with limited effect, or by submitting a Request for Abatement in writing.
The IRS may also have the authority to issue a tax lien or levy. While a tax lien is a legal claim against your property to secure payment of your tax debt, a levy is a legal seizure of your property. A lien is released within 30 days after the tax debt has been paid. A levy can be released if the IRS determines it would cause economic hardship in rare cases.
After the proceeds of the levy have been sent to the IRS, you can request that your property be returned to you. The Internal Revenue Service must release a levy if the amount owed was paid, the period for collection ended, or releasing the levy will help you satisfy your tax debt. Entering into an installment agreement can also discontinue a levy.
Applying for an Offer in Compromise
An offer in compromise allows a taxpayer to settle your tab with the Internal Revenue Service for less than the full amount that is owed. If you are unable to pay the total amount or doing so would result in substantial financial hardship, an Offer in Compromise may be an option to consider. In assessing your eligibility, the IRS will evaluate your ability to pay, your income, your expenses, and your asset equity. Typically, offers in compromise are approved when the amount offered represents the most it can expect to collect within a reasonable time frame.
Those who are eligible to apply for an offer in compromise include taxpayers who:
- Have filed all required tax returns and made the estimated required payments
- Do not have a bankruptcy proceeding pending
- Have a valid extension for the return in the current year
- Are an employer and made tax deposits for both the current quarter and past two quarters prior to applying
Payment can be made in a lump sum by submitting a payment of 20% of the total offer in compromise amount along with the application. Any remaining balance must be paid in five or fewer payments. Alternatively, periodic payments may also be made — an initial payment should be submitted with the application and the remaining balance can be paid in monthly installments until it is paid in full.
Importantly, if you apply for an offer in compromise and the offer is rejected, you have 30 days to file an appeal with the IRS.
In filing an Offer in Compromise, the taxpayer surrenders all beneficial tax attributes – like Net Operating Losses.
Opting for an Installment Plan
An installment plan is an arrangement in which the Internal Revenue Service will collect the amount that is due over an extended time frame. During this period, the IRS cannot levy and collection efforts are suspended. Those who may be eligible for a monthly long-term payment plan include those who owe $50,000 or less in taxes, penalties, and interest combined — and have filed all necessary tax returns. A short-term plan that requires payment to be made within 180 days or less is meant for those who owe less than $100,000 in taxes, penalties, and interest combined.
Significantly, sole proprietors and independent contractors should apply for a payment plan as an individual. Businesses may qualify for a long-term installment plan if they have filed all necessary returns and owe no more than $25,000 in combined tax, penalties, and interest. In some cases, payment plans may be revised after they have been entered into if the monthly payments cannot be made.
Contact an Experienced New York Tax Attorney
Whether you’re an individual taxpayer, you’re self-employed, or you own a business, failing to understand your tax obligations can have a substantial economic impact on you. Offering skillful advice and reliable representation, Brinen & Associates provides crucial guidance for clients regarding a wide variety of tax matters. Call (212) 330-8151 or send us a message to learn more about how we can assist you and your business.