THE THREE MOST IMPORTANT THINGS TO DO WHEN YOU KNOW YOU OWE MONEY TO THE IRS.
1. Make sure you really owe the money
If you owe a lot more tax than you expected, find out why. Read your completed return carefully and look for errors. It’s easy to add the same income twice, or to forget an important deduction. Maybe the IRS does not apply all your prior payments. If you expected to qualify for a deduction or credit, and your tax return doesn’t show it, make sure you answered all the questions correctly. One missed question or checkbox can cause you to miss out on tax benefits you may be entitled to.
Another way to determine if something is amiss is to compare this year’s return to your tax return from last year. If your tax situation has not changed drastically, but your tax bill has, find out why.
Just because you received a letter from the IRS that you owe money, don’t automatically assume the IRS is correct. They make mistakes, too. And if you did not file a return, the one that IRS prepares for you will almost always shows a higher liability than if you filed your own return. While you can attempt to contact the IRS for clarification, it is difficult to reach a person who has the knowledge and experience AND THE TIME to understand your problem and work out a solution. Also, when you do finally get to speak with an agent, they are acting in the best interest of the IRS – NOT YOU.
Never should you seek any payment resolution on a liability that is erroneously more than what you really owe.
2. Minimize penalties and interest
Exceptions to underpayment of tax penalties
If you underpaid your taxes this year, but you owed considerably less last year, you generally don’t pay a penalty for underpayment of tax if you paid or had withheld at least as much as you owed last year, and you pay by the due date this year. By looking at last year’s tax liability and other tax information, it can be determined if the safe harbor rule reduces your penalties and interest. You may also be able to reduce your penalties and interest using the annualized income method if you received more of your income in the latter part of the year.
Ask for an abatement of penalties
The IRS may reduce or remove penalties and interest on the penalties if a taxpayer writes a letter explaining the situation. But notice that the interest on the tax cannot be abated. In order to succeed, you must show “reasonable cause” which may be met where you had an unusual tax event, you made an honest mistake, or you or your spouse had a serious illness.
Pay as quickly as possible
If you owe tax that may be subject to penalties and interest, don’t wait until April 15th or if on extension October 15th to file your return. Send an estimated tax payment or file early and pay as much tax as you can.
3. See if you qualify for an Offer In Compromise or alternatively ask for an installment plan
If you can’t pay the tax by the time it is due, don’t avoid the bill. It will only get worse.
The IRS must allow you to make payments on your overdue taxes if you owe $50,000 or less and you can show that you cannot pay the amount you owe now. In that situation you may qualify to pay off the tax in as long as six years. Of course, you must also agree to comply with the tax laws, and you or your spouse must not have had an installment agreement with the IRS in the past five years.
Because an installment plan does not allow for any discount of the amount owed and the balance will continue to accrue penalties and interest, serious consideration should be given to an Offer In Compromise (OIC).
You’ve probably heard ads for experts promising to help you settle your IRS bill for less than you owe. It’s true that the IRS will negotiate back taxes through an OIC.
However, you must plan on offering at least as much as your net worth – everything you own, reduced by your debts. There are also other considerations involved including whether you are a wager earner or you own your own business. You should first seek advice from an expert who is knowledgeable and has the experience in working OIC cases with the IRS. Check their credentials to make sure they are reputable – that is always the best way to insure that you have someone who is established and accountable to their clients. Nowadays, it is so easy and quick to check somebody out on the internet or through any professional licensing boards (i.e. State Bar, CPA, etc.) they are subject to.
At the Law Offices Of Jeffrey B. Kahn, P.C. we attempt to get prompt control of your tax problems and lay out a Tax Resolution Plan. Don’t Delay.Contact us Now!