April 15th is near and taxes are due. 2009 paperwork is being rummaged through, and Americans are working hard to get their taxes ready.
Paying taxes can put a big dent in our collective wallets, but a small percentage of people are going to come out owing more than they can actually afford (ouch!). So what happens if you truly cannot pay your tax debt?
This is a tough situation for anyone to be in. But like any difficult problem, there is always a solution. One thing you need to remember is that you should never just ignore your tax problems. A small or medium size debt could snowball into a huge problem that could even land you in jail. Also, the penalties for not paying your taxes and not filing your taxes are completely different! You will owe MUCH more for not filing, than if you simply can’t pay what you owe. Whatever you do, ALWAYS file your taxes.
A new trend among people that are having tax problems is to turn to their trusty credit cards. But, this might not be the smartest thing for someone who already has a debt problem. It depends on your history with credit cards and your current income. If you have a habit of not paying your bills on time, you might want to reconsider. Creating a credit card debt problem to replace a tax problem might just be digging yourself into an even deeper hole. But, if you have a steady income and the cash flow problem is just temporary, it might be worth it (only if you can pay it off quickly). Just make sure that you have repayment plan in place. You don’t want to let that interest grow into something you can’t afford.
What are your options if you don’t have the cash?
If you a facing financial problems, you might be able to negotiate a payment plan with the government. If you have less than $10,000 in tax debt you can fill out Form 9465 to set up an installment plan. The government may or may not agree to this. After you send in this form an IRS agent will evaluate your finances. If they believe you are truly having financial trouble, then they will most likely approve you for this installment plan. But keep in mind interest and penalties will still apply.
Now if you are really in financial hardship and an installment plan is still too much, the government may accept a reduced payment. This is called an “Offer in Compromise”.
To qualify for an Offer in Compromise you need to complete Form 656 and Form 433A. You will need to send complete records of your finances and an agent will decide if they will accept a reduced rate. The criteria for you to qualify for this compromise depends on the financial records you submit. If they believe you cannot pay the full amount, the amount due is incorrect, or that there are other special circumstances they might grant an “Offer in Compromise”. But keep in mind the IRS is tough, and they only offer OIC’s to people whose finances are in very bad shape. When you apply for an OIC, you admit liability of the tax debt. This will make it very difficult if you want to protest it later on.
Hire a CPA or Tax Attorney
There will be extra fees if you get outside help, but its possible that they may save you more money in the long run. A CPA or attorney will have much better knowledge of the tax laws, and may be able to work the system better than you could by yourself. But like with anything else, you need to shop around for the right company or you could get burned. Just like other areas of the debt settlement industry, these companies tack on fees that can add up quickly if you choose the wrong company. Make sure you read the terms of your agreement very carefully before you sign.
If your tax debt is greater than your income can afford, you need to handle it quickly. Remember that interest on your debt is always adding up. You can take the “do it yourself” route or hire a professional to help. There is also a lot of information on the Internet to get you started. Begin your research at home, then make some calls. It doesn’t hurt to call a tax professional just to pick his or her brain and get you moving in the right direction. The more you learn about the process, the better your outcome will be, and hopefully you’ll pay less in the long run.
About the author: This is a guest post by Garrett Driscoll from Debt Eagle. Visit his site if you are having debt problems or need information about bankruptcy, bad credit, or collector issues.