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Filing Extension But Still Can’t Pay? Explore Your Tax Debt Options

Were you one of the estimated 19 million taxpayers who requested a filing extension this year? If so, you have until October 17 to submit your 2021 tax return. For those impacted by Hurricane Ian and other disaster situations, however, the IRS has pushed the extension deadline to February 15, 2023. Even if you have an extension to file your taxes, you should have paid any expected tax balance by the original filing deadline of April 18, 2022. If you’re waiting to file because you can’t pay, don’t. It’s only going to make matters worse. Now is the time to submit your returns and explore your tax debt options.

IRS Tax Debt Options

Not paying your federal income taxes by the original filing deadline can have costly consequences. The IRS assesses a 0.5% failure-to-pay penalty fee each month for any overdue taxes, as well as interest (6% as of October 1, 2022). The penalty fee maxes out at 25% of your unpaid taxes, which can add up to quite a bit over time. Additionally, having an outstanding balance can result in tax offset, the filing of a federal tax lien against your property, and may impact your ability to acquire loans. There are, however, several options for addressing your outstanding balance if you’re unable to pay in full.

IRS Installment Agreement

Setting up an IRS payment plan is fairly simple, especially if you owe less than $50,000. And if you file your tax return on time, the failure-to-pay penalty fee is dropped to 0.25% per month during the approved payment plan period. Depending on the plan you choose, your payments may be spread across several months or several years.

While your installment agreement application is under review, the  IRS will also suspend collections on your account (wage garnishment and/or levies). Once approved, you’re protected as long as you do not default on your agreement.

If you meet the following requirement, you may apply for a payment plan online:

  • Long-Term Plan: You owe $50,000 or less in combined tax, penalties, and interest. All required tax returns must also be filed.
  • Short-Term Plan: You owe less than $100,000 in combined tax, penalties, and interest.

Business owners may also file online if they owe $25,000 or less and all returns are filed. Sole proprietors should apply for an IRS payment plan as an individual.

Offer in Compromise

If an IRS payment plan isn’t an option, you may be able to settle your tax debt for less than you owe. This type of tax negotiation is known as an Offer in Compromise (OIC). It’s generally for those experiencing financial hardship.

The IRS considers many factors before approving this type of tax relief, including:

  • Your ability to pay
  • Income
  • Expenses
  • Asset equity

They also consider how much money they can expect to collect within a reasonable amount of time. If your offer is below that figure, it’s likely to be denied. Filing an OIC application is complex, so we highly recommend working with a tax professional to increase your chances of having your offer accepted.

Currently Not Collectible

In situations of extreme financial hardship, the IRS may place your account in a Currently Not Collectible (CNC) status. Although this does not stop the clock on penalty and interest fees, it does cease all collection actions. You won’t be required to make any payments until your financial situation improves, but the IRS may take your future tax refunds to help pay down your balance. If the statute of limitations runs out while you’re in a CNC status, any remaining tax debt for that filing period is forgiven.

You can request consideration by calling the IRS directly, but it may be beneficial to work with a tax professional. A tax specialist can pre-qualify you and prepare the required Collection Information Statement (Form 433-A or 433-F). They can also submit any unfiled tax returns, as this is a requirement for CNC status.

Penalty Abatement

Nearly 1.6 million taxpayers will receive refunds for late-filing penalties on their 2019 and 2020 tax returns. This tax relief was a direct result of the enormous backlog the IRS faced during the height of the coronavirus pandemic. If you’re waiting for similar relief for filing or paying your 2021 taxes late, don’t hold your breath. The IRS is beefing up its staff numbers and will be ramping up its collection efforts.

There is, however, an avenue to seek relief for certain tax penalties. If you were unable to file or pay on time due to circumstances beyond your control, you may qualify for penalty abatement. You can request abatement by phone (use the number on your notice) or by filing Form 843, Claim for Refund and Request for Abatement.

Don’t Wait – File & Pay As Soon As Possible!

You can avoid the last-minute rush to file by submitting your return electronically any time before October 17, 2022. If you fail to file by the extension deadline, be aware that your failure-to-file penalty fees and interest will be calculated from the original April 18 due date, not the extension deadline. Failure-to-pay penalty fees, however, are already adding up.

If you need help finding an affordable solution for your unfiled returns and unpaid taxes, call Tax Defense Network at 855-476-6920. We’ll work on your behalf to get you the best resolution possible at a price you can afford. Contact us today for a free consultation and quote!