Do you owe taxes to the IRS? If so, you need to take care of it immediately. Ignoring the problem, in the hope that it might disappear, will simply land you in more trouble. The longer you wait, the more the penalties and interest will accumulate. Believe it, or not, it can often be beneficial to borrow money, perhaps even from high-interest credit cards, than to incur the penalties and interest from the IRS.
The interest and penalties can soon add up. You start of with what appears to be a manageable debt and, before you know it, you can owe two or three times what you started with. Typically, the interest portion, which starts accruing from the day the tax return was due, cannot be abated.
This might seem harsh, but the IRS believes that the penalties and interest should be excessive in order to encourage businesses and individuals to comply with the tax obligations. And, don’t imagine that it’s just based on the amount of debt. For example, one penalty that the IRS can apply is for submitting a frivolous return. The IRS has a list of what is considers “frivolous”, and they keep adding to the list. The list includes trying to avoid paying taxes because you’re object to military spending, deliberately using the wrong tax tables, providing inconsistent information, and so on.
One common penalty is for “failure to file” – something that can be imposed if you did not file your tax return on time, but owed tax on that return. The penalty might be small, but can go as high as 25% of the tax owed, especially if the unfiled return was due a long time ago. So, even if you cannot pay your taxes in full, you should still make sure that you file your return, and then negotiate with the IRS to resolve your debt. In many cases, taxpayers may be able to set up, for example, a streamline installment agreement.
There are multiple resolution options that you can assess to pay off your tax debt, including offers in compromise, installment agreements, partial payment plans, etc. However, don’t be surprised if you continue to accumulate penalties and interest.
Of course, if you haven’t paid your tax debt, even if you did file on time, you might still incur a “failure to pay” penalty. One common misconception is that filing for an extension gives you more time to pay your taxes – wrong. The extension is purely for the date of filing. You are still make your best estimate on the amount of tax owed and pay it on time; do not wait until your extension deadline.
There are many other types of penalties and interest that the IRS can apply. These include underestimating the tax due, late payment of estimated tax, accuracy-related penalties, a penalty on unpaid withholding taxes, and many more.
There is no escape from the IRS – you can run, but they will find you. Firstly, always file all paperwork on time and as accurately as possible. Be proactive in trying to settle any debt. Your best weapon is knowledge – knowledge of the inner workings of the IRS and the penalties and interest that they can impose, which is fully explained on their website. Any taxpayer can negotiate with the IRS. If you owe a large amount, or your situation is complex, a 20/20 tax expert can help to ensure that you get the best possible resolution allowed by the law.