Not being able to pay your taxes is likely not as bad as you think it is. Everyone has heard the stories of the IRS taking homes, cars, boats, and other things that devastate people’s lives. The truth is, the IRS is very willing to work with taxpayers that are having financial problems. The IRS will only pursue harsh collection actions if they have exhausted all other options and feel they are working with an taxpayer that is not willing to work with them. One important thing to realize when picking a method to pursue is that the IRS will analyze your financial situation and will not allow you a method that is meant for people in worst of situations than your own. Below are 4 common methods used by taxpayers depending upon their tax and financial situations.
- IRS Installment Agreement: This is by far the most common method for individuals to pay their taxes when they cannot pay in full. With an installment agreement the taxpayer will be allowed to pay back the taxes owed in monthly increments. If the taxpayer remains current on their monthly payments they will be considered in good standing with the IRS. There are actually 4 different types of installment agreements that can be used. The installment agreement used is determined by how much is owed in taxes, how much the taxpayer can afford to pay and how long it will take the taxpayer to pay off the taxes owed.
- Offer in Compromise: This program was designed to help the severely financially burdened taxpayers get back on track. With an offer in compromise the IRS will allow the taxpayer to settle the taxes they owe for less and they will wipe clean the remaining outstanding debt. The filing process for this is very tedious and difficult. The IRS does not make this program easily available to just anyone. In order to qualify the taxpayer will have to prove to the IRS that the amount they are offering is equal to or greater than the amount the IRS would ever expect to collect from the taxpayer. Many people feel it is unfair to let people settle their taxes owed for less but financially this makes sense. If someone is able to release their financial tax burden that they will likely not be able to pay, this can allow them to get back on track and eventually earn more money down the road and pay more taxes to the government since they won’t be financially restricted by their debts.
- IRS Hardship: If a taxpayer is in a bad situation and cannot pay taxes currently, the IRS can put a temporary hold on collections. The IRS does realize that there are times when individuals cannot pay their taxes and they do not want to make them pay them if it would end up causing financial hardship. When a taxpayer is placed on financial hardship the IRS will leave the taxpayer alone for several months and possibly several years and will check back to see if the financial situation has improved enough for the IRS to collect the taxes owed.
- Tax Bankruptcy: There are a few types of bankruptcy and it is difficult to discharge tax debts using bankruptcy. With chapter 7 bankruptcy, all assets are liquidated to pay off the debts owed and there is a possibility that the remaining tax debts if all qualifications are met. Realize that with chapter 7 bankruptcy, there are many qualifications to eliminate taxes owed and most people do not meet these qualifications. Chapter 13 bankruptcy it is highly unlikely that taxes can be discharged. If chapter 13 bankruptcy is used it is likely that the taxes owed will have to be paid back through a payment plan. Most of the times, there is a better solution than bankruptcy to get back on track with taxes. There are some instances if you owe other debts as well as tax debt that it could be an option.
Believe it or not, the IRS kind of does have a heart. The only thing you need to know is that the IRS will be merciless until the taxpayer takes initiative to work with the IRS and prove to them that they cannot pay. Once the IRS realizes that you cannot pay and they agree with you, they will allow you to come to some other form of agreement instead of being required to pay the taxes owed in full. It is important to work with the IRS in order to prevent them from taking collection actions. Many times it is a good option to work with a tax professional that can analyze your situation and they can pursue the option that will fit you best financially.