Let’s face it, we all hate to pay taxes. Filing our tax returns is often painful and time-consuming, not to mention expensive. Unfortunately, many people encounter some type of tax problem during their lifetime. Whether it is failing to file their taxes on time, not having the money to pay taxes that are owed, or failing to file a tax return for years at a time. Tax problems are common.
The best way to avoid tax problems is, obviously, to file and pay your taxes on time. The next best way to avoid problems is to file your tax return or extension on time, even if you do not yet have the money to pay outstanding taxes. The filing of the tax return will stop hefty penalties from being assessed against you.
The penalty for failure to file your return on time is 5% of the amount owed for each month the return is late to a maximum of 25%! For example: If the amount of tax owed is $10,000 and you file your return six months late, you will be liable for the $10,000 tax plus $2,500 in failure to file penalties plus interest. This is a rate that would make most loan sharks foam at the mouth. Thus, even if you cannot afford to pay your tax, you can save yourself a significant amount of money by simply filing your return on time.
Potential solutions where you owe taxes
Most individuals and small businesses that encounter IRS problems are not aware that there are several potential options available to reduce their IRS debt. Like most things in life, even IRS taxes are negotiable.
Before the IRS will consider any negotiations you must be up to date by filing all delinquent returns. Once your returns are up to date you can negotiate with the IRS to abate penalties, interest and even reduce significant tax liabilities if payment is beyond your means. Penalties
The IRS, where appropriate, will “abate” penalties. If a taxpayer can show “good cause” any penalties that have been incurred may be wiped out and the taxpayer will not be responsible to pay them. There is no hard and fast definition of “good cause” for which to abate penalties. All sorts of problems can fit under this term. Thus, it is important to consult with your tax professional to discuss your options.
Instead of paying the IRS everything that you owe in one big chunk, the IRS may agree to accept regular payments to pay back taxes. A payment plan can help you avoid embarrassing wage garnishments and inconvenient levying of your bank account by the IRS
Offer in Compromise
Another alternative for paying off a large tax liability is the Offer in Compromise. This is where you make a lump sum payment to the IRS to resolve all outstanding taxes owed. Generally, this occurs where you are simply unable to pay back taxes. Often, an Offer in Compromise can be made for a percentage of what you owe.
It is important to take care of your tax problems as soon as possible. Procrastinating only results in more penalties and interest being assessed against you. You can deal directly the IRS, or have an attorney or other tax-preparer represent you.