WADDY

7001 Johnnycake Road
Suite 208
Catonsville, Maryland 21244
Phone: (410) 298-0300

You Owe Taxes… Now What?

April 26, 2016adminBlog0

So you’ve completed your tax return and discovered that the last line of your 1040 form shows that you owe taxes, despite all of the deductions and credits that you may have amassed. Now what?

First and foremost, pay your tax bill. Admittedly, depending on the amount you owe, that may be far easier said than done. If you can’t pay the entire amount, pay as much as you can in order to reduce interest and penalties for late payment. The IRS accepts payment in various ways. You can pay online via your credit or debit card or by using IRS Direct Pay to direct funds from your checking or savings account at no cost to you. Depending on the deadline, you may opt for a same-day wire transfer from your bank (bank fees may apply), send a check or money order, or pay with cash at an IRS retail partner. (Note: cash payments require five to seven business days to process, so be certain you allow enough time to avoid a penalty.) Businesses can also pay the IRS via EFTPS® (Electronic Federal Tax Payment System) upon enrollment.

Installment Agreement
If you are unable to pay your tax bill in full, you can make monthly payments through an installment agreement. Individuals can apply for an online payment agreement provided their total tax liability (including payment, interest, and penalties) is $50,000 or less and all required returns have been filed. For businesses, that threshold is $25,000 or less. If you don’t qualify for the online payment agreement, you can still make installment payments by completing Installment Agreement Request (Form 9465) and Collection Information Statement (Form 433-F).

You may opt for a short-term extension to pay if you can pay your tax bill in full within 120 days or less. There is usually no set-up fee for a short-term extension. Keep in mind that you will still be responsible for interest and penalties.

Offer in Compromise
According to the IRS, “An offer in compromise allows you to settle your tax debt for less than the full amount you owe. It may be a legitimate option if you can’t pay your full tax liability, or doing so creates a financial hardship.” The IRS first considers these factors: ability to pay, income, expenses, and asset equity. For the IRS to consider your Offer in Compromise, you must be current with all filing and payment requirements and may not be in an open bankruptcy proceeding. The IRS provides an online guide to determine your eligibility (Offer in Compromise Pre-Qualifier). It’s important to note that interest and penalties continue to accrue during the consideration of your offer. A Notice of Federal Tax Lien will also attach to your property during this time.

There is an application fee (currently $186), and you will have two payment options. The Lump Sum Cash option requires 20 percent of the total offer paid with the offer and the remaining balance paid in five or fewer payments or within five or fewer months of the date your offer is accepted. The Periodic Payment option requires first payment with the offer and the balance paid in six to 24 months, according to the terms of your offer.

How Long Do I Have to Pay My Taxes?
Your tax return and your payment are due on April 15th (or an adjusted date depending on weekends and holidays). First and foremost, regardless of your ability to pay, be certain that you file your return (or a request for extension) by the due date. Keep in mind that filing for an extension on your return does not change the date on which your tax bill is due. The interest and penalty clock starts ticking immediately even if you’ve filed for an extension (with the exception as noted below).

The late-payment penalty is 0.5 percent of the unpaid amount per month, up to 25 percent of the balance; however, the failure-to-file penalty is five percent per month, so be certain your return or extension request is filed by the deadline. If you file for an extension, the late-penalty fee won’t apply during the extension period provided you’ve paid at least 90 percent of your tax liability.

The Next Step
Normally a balance due to the IRS is caused because you’re not withholding enough taxes throughout the year or need to pay more estimated taxes.  Contact us, so we can review your overall financial picture and realign your withholding so that you’re not faced with a big tax bill next year.

Also, remember that not every accountant or tax professional has the ability to represent you before the IRS. Eric Waddy is an enrolled agent and has completed the comprehensive testing and continuing education required by the IRS to represent you.

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