There is nothing worse than calculating your taxes, owing a lot of money and looking at your bank accounts and credit cards and realizing you do not have the funds to pay. It's worse if you have a low wage job or work for yourself. I fall into the latter category. I work for myself and paying income taxes falls solely on me. This results in my owing taxes to the federal government every year.
Filing And Owing
I file my taxes on time every year regardless of my ability to pay. The penalties for not filing are worse than not paying, and the IRS recommends that taxpayers file a tax return whether they have the funds to pay or not.
Failure to file a return can result in the IRS filling out a substitute tax return for you. The substitute return will not include every deduction and credit. Typically, they only include the earned income and the single exemption that every taxpayer can claim. This results in owing more taxes than you actually owe. Because of this scenario, I make sure to file my taxes by the April deadline every year.
Inability To Pay
Tax bills are often several hundred or several thousand dollars. I never have that much money in any of my bank accounts. Thankfully, the IRS offers several ways to pay, including payment plans and tax bill settlements.
The IRS offers affordable payment plans for as low as $25 a month. In order to set up a payment plan, I had to call the IRS and request one. During the conversation, the woman asked me how much I could pay a month. I said $25 since I already knew the lowest amount they would accept. The catch to the IRS payment plans is that the entire balance must be paid by the tax filing deadline of the next year. If I still owe money to the IRS and I owe more money after filing, my payment plan could be deemed void, which would require calling the IRS again.
IRS Tax Settlement
An IRS tax settlement is called an "Offer in Compromise" and works similar to a traditional debt settlement agreement. The individual or business must complete and submit one of two lengthy forms; either IRS Form 433-A or Form 433-B and pay a $150 application fee. Along with the application fee, taxpayers must also submit a money order or a cashier's check for 20 percent of their offer. If approved, the remaining amount must be paid in five or fewer payments to the IRS.
Individuals that qualify for low income do not have to submit any money with the application. However, when I looked over the paperwork, I realized I needed to include all of my bank statements, investment accounts and assets as well as business expenses and liabilities. This option would have required me to hire a tax professional to fill out all the forms and ensure the calculations were correct. Since my bill wasn't thousands of dollars, I decided against this route.
My Payment Plan
I worked out an agreement with the IRS to pay them $25 a month until my tax debt is paid off. My total tax bill amounted to just over $600. Unfortunately, $25 a month will not pay off my tax bill by April 15, 2013. This means that before April 15th, I need to call the IRS and pay the remainder of my tax bill. If I fail to pay off my 2012 tax debt before April 15th, I risk losing my payment plan and having to renegotiate with the IRS.
If I had chosen not to communicate my financial hardship with the IRS, the IRS could have placed tax levies against my home. They could have frozen all of my bank accounts, issued wage garnishments against my income and taken my car and any other personal property they deemed valuable enough to sell to cover my tax debt.
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