It’s probably safe to say you don’t relish preparing your annual income tax returns. It is essential, however, that you do file your taxes — or you could face serious consequences.
Tax returns serve a variety of purposes; you might need them to apply for student financial aid, a mortgage, or a personal or business loan. In addition, your Social Security, disability and Medicare benefits are based on your reported earnings.
If you ignore IRS letters regarding back taxes, it could lead to serious consequences such as bank levies, tax liens and wage garnishments, said Michael Raanan, MBA, EA, owner of Landmark Tax Group and former IRS agent. “The best advice we can give is to not ignore the problem,” said Raanan.
Don’t end up in a bad situation with the IRS. Follow these seven tips and take immediate steps regarding a late tax return or back taxes.
1. Consult a Licensed Tax Professional
If you get a notice from the IRS, seek help from a qualified professional before you take action. “You are entitled to tax representation in any matter with the IRS, and you should never try to handle any tax issues without proper representation,” said Raanan.
You can ask the IRS to briefly halt any collection activities until you’ve secured tax representation, said Raanan. “Do not hesitate to do so, as a long delay will only make things worse,” Raanan said.
2. Understand Your Rights and Options
You shouldn’t put off dealing with your tax problems, but you need to understand your legal rights before you jump in, according to Raanan. “Do not let the IRS intimidate you into thinking you have no option but to immediately pay the amount of your back taxes in full,” said Raanan. “IRS agents can be quite threatening, so it is important you remain calm and collected and understand your options.”
Seek guidance from a licensed tax professional and familiarize yourself with your legal rights. You might have more options than you think.
3. File Even If You Can’t Pay
The most important thing to do is file a tax return as soon as possible. Oddly, the failure to file penalty can be 10 times as much as the penalty for failing to pay.
“The penalty for late filing is 5 percent of the unpaid taxes for each month that the tax return is late,” said Josh Zimmelman, owner of Westwood Tax & Consulting, a New York-based accounting firm. “The penalty for late payment is 0.5 percent of your unpaid taxes for each month that the payment is late,” he said.
Each day you wait to file and pay, your problem becomes worse. Make sure you file so the penalties don’t add up.
4. Request an Extension
Individual taxpayers can get an extension to file a tax return for up to six months — or longer if you’re living abroad. To get an extension, file Form 4868 — but remember that this will extend your filing deadline, not your payment deadline.
If you pay at least 90 percent of the amount you owe by the tax deadline, you might not be liable for the failure to pay penalty, but only if you pay the outstanding balance by your extension date. Otherwise, you’ll owe retroactive interest from the original due date.
5. Set Up an Installment Agreement
The IRS might be willing to set up a monthly payment agreement if you owe less than $50,000 in combined tax, penalties and interest and you’ve filed all your required returns. Use the IRS online payment application to find out if you qualify for an installment agreement.
Make sure you stick to your repayment schedule. “In the event that you miss a required IRS deadline, it has the right to revoke the payment arrangement and restart the collection process,” said Raanan.
Don’t Miss: 7 Tips for Paying Off Back Taxes
6. Pay by Credit Card
Although you don’t want to increase your personal debt in addition to the taxes due to Uncle Sam, paying with your credit card might be a solution. “If all else fails and you must pay your tax balance in full, you might consider paying with a credit card,” said Zimmelman. “Even though you might end up paying interest charges on your credit card balance, depending on your [credit card interest] rate, that might still be cheaper than paying IRS fines and interest charges.”
When you charge the amount of your taxes to a credit card, you don’t pay the IRS directly, you pay a commercial payment processor via the internet, phone or mobile device. The company charges you a fee — which might be tax-deductible — and you can find a list of approved processors on the IRS website.
7. Make an Offer In Compromise
If all else fails, try negotiating with the IRS. “If you can prove that you cannot afford to pay your taxes, the IRS might be willing to make a compromise and reduce your balance,” said Zimmelman.
The IRS will consider your entire financial situation, including your income, expenses, assets and ability to pay. You must have filed all your returns — unless you have an extension for the current tax year — to apply, and you might be approved for a lump sum or periodic payments. To see if you’re eligible, use the IRS offer in compromise pre-qualifier tool.
Tax matters can be tricky and the repercussions for failure to file or pay can create serious problems. But you do have options when your delinquent taxes become a problem. Consult a licensed tax professional before you engage with the IRS to rectify your situation.