Tax Debt Advice - Payment Plans & Forgiveness Options

It is not surprising that millions of taxpayers fall behind in their obligations to the IRS every year, but it may be surprising that there are several tax-relief programs available to bail out consumers.

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As calendar dates go, April 15 doesn’t exactly create the heart palpitations of December 25, February 14 or even the Fourth of July.

However, you can’t deny that April 15 has an ominous ring. It’s TAX DAY and it feels like the Internal Revenue Service is coming to get you! It’s a time when then American wallets generally take a hit … unless … What if someone can’t pay their taxes?

Or what if someone won’t pay their taxes? What then?

If you can’t pay your taxes, there are alternatives. There are tax debt relief options, tax debt loans and tax debt payment plans. If you willfully won’t pay your taxes, there are risks.

Obviously, can’t and won’t are two different things, each carrying their own options and consequences. But as Uncle Sam himself admits, there’s never perfect attendance on Tax Day.

In 2014, the most recent year that data is available, the IRS said an estimated one million people – who were due refunds totaling $1.1 billion – didn’t file taxes.

Many millions more – who did owe taxes – didn’t file either, but the IRS says it doesn’t keep a record of that. Outside agencies estimate the number at seven or eight million non-taxpayers.

That’s a lot of blank 1040s, but there isn’t much the IRS can do. It has lost 25% of its staffing because of recent budget cuts and though it tries to be vigilant about compliance, diminished resources makes that a futile exercise.

Where Can I Get Tax Debt Help?

First, some basics. Your local IRS Taxpayer Assistance Center is a great starting point for help with taxes. They should be able to explain IRS notices or help set up an installment plan if you can’t afford your tax bill.

If you have trouble communicating with them, try the Taxpayer Advocate Service, which is a separate organization within the IRS that ensures individuals are treated fairly and understand their rights regarding taxes.

More complicated tax issues? You need to see a tax attorney. These situations can include an IRS audit, negotiating a settlement or repayment plan with the IRS or a criminal investigation for tax fraud or tax evasion.

Can Tax Debt Be Consolidated?

We see it with other financial issues, so it’s a natural question. If you have years and years worth of tax debts, can’t those bills be consolidated into one payment? Yes, but don’t think of it like credit card consolidation, where combining balances can reduce the total payment.

Tax payments are different.

Each tax debt is a delinquent balance for a specific year, generating its own penalties and interest on those penalties. When the tax debt notices roll in each year, they are separate, not cumulative. But the IRS has presented a workable solution.

The Installment Agreement (IA) allows you to pay your tax debt back in fixed monthly installments. The repayment period can be up to six years. Penalties and interest will accrue for the life of the debt, but here’s an advantage. The IRS will include tax debts from several different years into one IA. That allows the comfort of just one monthly tax bill.

Be forewarned, though. If you roll multiple years of tax debts into one IA, watch out for any new tax liabilities. For example, if you have an IA and make a mistake on next year’s tax return, thus forcing another delinquent tax bill, the IRS will invalidate your IA plan and you must start over. Before embarking on any decisions, it’s always wise to contact a licensed tax professional.

How Much Interest Does the IRS Charge? What about Penalties?

The tax due date is April 15 each year (unless that date falls on a weekend or holiday). If you miss the deadline and still owe money to the IRS, there is a penalty, even if you file for an extension.

Penalties are broken down into three categories:

1. Interest

Interest starts building immediately after the due date and is compounded daily. The rate is calculated quarterly based on the federal short-term rate plus 3%. That puts it at 5.57% as of February 2019.

2. Failure-to-pay penalty

The failure-to-pay penalty applies when you haven’t paid at least 90% of the taxes owed by the tax deadline. The failure-to-pay penalty is ½ of 1% of the amount of unpaid tax. It is applied each month up to a maximum of 25%. The penalty increases to 1% if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy property.

If you file your taxes on time and request an installment agreement, the penalty decreases to ¼ of 1% per month until the tax is paid.

3. Failure-to-file penalty

Failure-to-file is a much steeper penalty than the failure-to-pay penalty, but it works in a similar way. The IRS charges 5% of the tax owed for each month your return is late, up to a maximum of 25%. The minimum penalty for filing over 60 days late is the lesser of either $210 or 100% of the amount of tax owed.

The IRS can reduce the penalties for filing late, if you can show reasonable cause and that the failure wasn’t due to willful neglect.

There isn’t a penalty for filing a tax return late if you are receiving a refund from the IRS.

What Are the Long-term Consequences of Tax Debt?

If you push tax payments beyond the normal late penalties, you will face more severe consequences.

The two most common:

  • The IRS can garnish your wages. That means it takes some of your paycheck before the money ever gets to you.
  • The IRS can seize your assets as payment or place a lien against your properties so you can’t sell without paying back the IRS first. Tax liens are one of the most toxic items to show up on your credit report, making it difficult for you to qualify for credit products.

If you find yourself in a long-term tax-debt hole, how can you dig out to avoid the severe consequences? There are a few alternatives.

Taking out a personal loan — If you borrow money from a private lender to pay off your tax debt, you will owe interest on the loan, but the rate likely will be lower than the IRS interest rate (plus the penalty). You avoid the hassle of the IRS potentially coming after your wages or assets. You just have to make monthly payments on your loan.

Using your credit card — It’s a decent option, especially if you can quickly pay off your balance. The IRS accepts all major credit cards and savvy users will employ a rewards credit cards to help earn cash back or travel bonuses.

The downside is a processing fee (usually ranging from 1.87% to 2.25%), which would negate any rewards and definitely put you behind if you can’t immediately pay the balance. You might find a card that offers 0% interest on purchases during an introductory period.

Also remember that paying back taxes on a credit card will add to your outstanding balance and raise your debt utilization ratio (credit-card balance compared to your credit limit), an important part of your credit score.

Before considering a credit-card option — especially if you’ve had difficulty with hefty credit balances in the past — you should consult with a nonprofit credit counseling agency. Counselors can assess your situation and point you to a reputable credit consolidation or debt management company that can help eliminate your credit card debt.

IRS payment plan — If you qualify, there are payment plans allowing up to 120 extra days to pay the full balance. There are also installment plans (with a $43 fee) that set up monthly payments.

Types of Tax Resolution Services

There are a variety of tax-resolution services for consumers who owe more than $5,000 in back taxes or face legal consequences from the IRS.

IRS audit defense — Attorneys will defend you when the IRS examines the accuracy of your tax return.

Wage garnishment resolution — Resolves a situation in which the government takes a portion of your paycheck to satisfy your tax debt.

Lien/Levy removal — Prevents the seizure of property by the government.

Offer-In-Compromise (OIC) — You can settle for less than the amount owed due to a disputed amount of tax debt or an inability to pay the full amount (after assets can’t cover the difference).

Currently Not Collectable (CNC) — Offers deferred payments for financial hardship situations like unemployment.

Criminal Prosecution for Those Who Don’t File?

What if you willfully don’t pay your taxes? Can you face criminal prosecution and jail time?

Possibly.

The IRS has targeted some groups — such as politicians, tax protestors, drug dealers, organized crime figures and high-income citizens — where prosecution can be used as a headline-grabbing deterrent for the general public.

According to IRS data, from 2011-13, there were 964 investigations initiated against individuals who didn’t file tax returns with 694 recommended prosecutions, 717 indictments, 681 sentences handed down, an incarceration rate of 85.8% and 42 average months served.

More commonly, the IRS has authority to prepare a return on behalf of the non-filer. Sometimes, the IRS generates a substitute return based on information received from third parties.

Then there’s the other side. In 2018, approximately 76.4-million (or 44.4%) of Americans won’t pay any federal income tax, according to the Tax Policy Center, a nonprofit joint venture by the Urban Institute and Brookings Institution. For the most part, these are people who don’t earn enough money, although they still give money back to the government in the form of Social Security and Medicare deductions from their paychecks.

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Author

Staff Writer

Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it seven years ago, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering college and professional sports, which are the fantasy worlds of finance. His work has been published by the Associated Press, New York Times, Washington Post, Chicago Tribune, Sports Illustrated and Sporting News, among others. His interest in sports has waned some, but his interest in never reaching for his wallet is as passionate as ever. Bill can be reached at bfay@debt.org.

Sources

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  3. Fottrell, Q., (2018, September 16), More Than 44% of Americans pay no Federal Income Tax. Retrieved from: https://www.marketwatch.com/story/81-million-americans-wont-pay-any-federal-income-taxes-this-year-heres-why-2018-04-16
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