Perhaps the scariest thing about doing a tax return is worrying that the final number will be more than your business—or you—can pay. If that happens in 2013, it’s not as scary as it has been in past years. Thanks to some new tax policies and low interest rates, most taxpayers who can’t pay their taxes on April 15 this year have some workable options.
From simple extensions and installment plans to agreements that could drastically reduce the amount you have to pay, the Internal Revenue Service offers several choices for people who owe more than they have. And, according to IRS records, many thousands of taxpayers every year request and receive various kinds of assistance with paying taxes.
Based on IRS documents and discussions with IRS workers and tax experts, here's what you should do if you can’t pay your taxes:
1. File a return. This is the most important thing you should do. It will cost you much more if you don’t file than if you file and don’t pay. Penalties for not filing are 5 percent of the unpaid amount due per month. By comparison, the failure-to-pay penalty is only one-half of 1 percent per month.
2. Pay as much as you can, even if it's not the entire amount. If you can pay as much as 90 percent of the total amount owed, you can even avoid any penalty by filing a Form 4868 request for a six-month extension of the time to file. Bear in mind: Form 4868 doesn’t give you extra time to pay, just extra time to file.
3. If you simply need a small amount of additional time to pay what you owe, you should contact the Internal Revenue Service. You can do this by calling 800-829-1040 or by completing an Online Payment Agreement application at www.IRS.gov. You may be granted an additional 60 to 120 days to pay. You will still, however, have to pay some penalties and interest.
4. Look into an installment plan with the IRS. While the IRS is not a bank, the agency does set up installment plans with thousands of taxpayers every year. And when you agree to pay by installment, the penalty on unpaid taxes is reduced by half, to 0.25 percent.
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IRS Form 9465 is the one you fill out to set up an installment plan. You can submit this form with your return or separately. If you owe less than $10,000, have been current on taxes until now, and request three years or less to pay what you owe, the IRS is required to agree to the plan. You can even set the amount you want to pay every month.
If you need more time, you can request up to 72 months, although this is not guaranteed. You’ll also have to pay a fee of $105, which can be reduced to $52 if your monthly payments are automatically drafted from a bank account. The current interest rate, which changes quarterly, is just 3 percent. This is considerably lower than most credit cards and competitive with bank loans.
You can use a Form 9465 if you owe up to $50,000 in taxes. If the amount is more than $10,000 the IRS is not required to agree, but the agency’s current policy is to approve amounts up to $25,000. If you owe more than $50,000, you may still be able to set up an installment plan, but you’ll have to fill out a Form 433, which is a financial statement describing your assets and income. The IRS will have to be satisfied you can’t pay from your assets, and perhaps that you can’t borrow the money, before agreeing to an installment plan.
A Fresh Start
An IRS program dubbed “Fresh Start” is the agency’s attempt to make it easier for people to pay their taxes. After starting in 2011, the program was revised last year to help taxpayers owing less than $50,000 get approved for installment plans and provide for longer repayment terms.
Some Fresh Start changes were aimed at allowing more small businesses to participate in the program. For instance, the amount of tax a small business can owe while still qualifying for an installment arrangement with little or no financial information was increased from $10,000 to $25,000. And a business can get 24 months to pay if payments are made by direct debit.
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Taxpayers who owe more than they can pay under an installment agreement still have the option of an Offer in Compromise. This is an agreement that lets a taxpayer off the hook for less than the amount owed. The taxpayer has to show the IRS, based on income and assets, that he or she can’t pay the amount in a single sum or even with an installment plan lasting 10 years, which is the statutory limit for tax collection.
The Offer in Compromise isn’t necessarily easy. The IRS wants taxpayers to offer the net value of their assets plus whatever income the agency determines isn’t necessary for living expenses for one or two years. Generally only about one in three Offers in Compromise are approved by the agency, but if it works, it can significantly reduce the amount you ultimately have to pay.
Payroll Tax Problems
Payroll taxes represent a special problem for business owners. Employers are generally required to file employee payroll taxes quarterly and pay them monthly or semi-weekly. However, during tough economic times, notes Mary Lou Gervie, an accountant with Watkins Meegan in Bethesda, Maryland, the choice may be paying salaries, rent and other pressing bills or payroll taxes. Legally, payroll taxes still must be paid.
Usually when a small business doesn’t pay payroll taxes, it’s because the business lacks the money and its credit lines are fully utilized. However, Gervie says business owners should borrow the money elsewhere, from themselves or family or friends if necessary, rather than not pay them.
“There is a huge cost to not paying the payroll taxes,” she says. For depositing these taxes even one day, late the penalty is 2 percent of the total tax due. After five days, the penalty increases to 5 percent. After 15 days, it’s 10 percent.
While the business owes the taxes, the IRS will often try to identify a “responsible person”—typically the owner—who will be held personally liable, Gervie says. The business may be able to set up an installment plan, similar to the ones used to pay income taxes. To qualify for this, the business will have to submit a Form 433-B. If the business can’t pay within a reasonable time, the IRS typically files a tax lien on its assets.
Limits of Relief
While the Fresh Start program can help many taxpayers, the dollar amounts of automatic installment agreements are generally too low to help businesses that are behind on payroll taxes, Gervie says. And the 9465 program won’t necessarily work for any taxpayer owing more than $50,000.
Bankruptcy may be an option. In some cases, a tax debt may be discharged through bankruptcy.
Nevertheless, for business owners who are looking at an amount larger than they can pay this tax season, there are many options to consider. Perhaps the most important one is to increase the amount of withholding or estimated tax payments they make for next year, so the problem won’t be repeated in 2014.
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