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Do this immediately to get back on track with your taxes.
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Being behind on your taxes is stressful. You may be worried about penalties, accruing interest, or the possibility of an audit. While it’s natural to feel anxious, don’t panic! There are several steps you can take to get back on track with the IRS and avoid any serious consequences. Here’s what to do when you realize that you’re behind on your taxes.
Understand penalties and interest accrual
The first step in getting back on track with your taxes is understanding how penalties and interest work. When you file your tax return late, you’ll be charged interest on any unpaid balances and you may also be subject to failure-to-file and failure-to-pay penalties.
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The IRS will assess a penalty for each month or partial month during which a tax debt remains unpaid. That penalty accumulates until the debt is paid off in full. The late payment penalty is 0.5% of the tax owed after the due date and caps out at 25%. Interest accrues on the unpaid balance and compounds daily until you pay the balance in full. The interest rate for taxpayers other than corporations is the federal short-term rate plus 3%.
Since the amount of both penalties and interest depends upon your tax liability, it’s important to make sure you understand how much you owe as soon as possible. This will help you work tax payments into your budget. Making payments immediately will help you minimize the amount of accrued penalties and interest.
File your returns on time and set up a payment plan
If you’ve already missed a filing deadline, then it’s important that you file your tax returns as soon as possible to minimize any potential penalties for late filing. If necessary, file for an extension to give yourself more time if needed. In addition to filing your returns, setting up a payment plan with the IRS can help keep your debt under control. This will allow you to pay back what you owe in installments over time instead of lump sum payments all at once.
You can apply for an online payment plan online through Form 9465. Once you submit your application, you’ll receive immediate notification of whether your payment plan has been approved without having to call or write to the IRS. Online payment plans are processed more quickly than requests submitted with electronically filed tax returns. There are two types of payment plans:
Short-term payment plan: The payment period is 120 days or less and the total amount owed is less than $100,000 in combined tax, penalties, and interest.Long-term payment plan: The payment period is longer than 120 days, paid in monthly payments, and the amount owed is less than $50,000 in combined tax, penalties and interest.
Offer-in-compromise
If you still can’t make your payments, then call the IRS immediately at 800-829-1040. The key is to make sure you promptly notify the IRS of your situation and keep the agency abreast of any updates. It may reduce the monthly payment to reflect your current financial condition. You may be asked to provide proof of changes in your financial situation, so have this information available when you call.
In some cases, the IRS may forgive part of your tax debt through an “offer-in-compromise.” This allows you to settle your tax liability for less than what you owe. According to the IRS, you may be eligible if you:
Filed all required tax returns and made all required estimated paymentsAren’t in an open bankruptcy proceedingHave a valid extension for a current year return (if applying for the current year)Are an employer and made tax deposits for the current and past two quarters before you apply
If you still need help with your tax debt, consider hiring a tax attorney to negotiate with the IRS. There are also certain tax-relief resolution companies that offer to help resolve tax debt. However, many state attorneys generals have issued warnings about tax-debt resolution scams. Be especially careful to avoid tax-relief companies that charge you money to help you. Hiring one may end up making a bad situation worse. It is important to do your research before hiring an attorney or using any of these services.
Being behind on your taxes can be nerve-wracking, but there are steps that taxpayers can take to get back on track with the IRS without accruing high amounts of interest or being audited. First, understand how penalties and interest works so you know how much money you owe at any given time. Next, file your returns promptly, even if you need to request an extension. Set up a payment plan with the IRS and hire a tax attorney if you need more help. Be careful when using a tax-relief company, as many may be scams. With these steps in mind, taxpayers who are behind on their taxes should have no problem getting back into good standing with the IRS before too long!
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