I’ve counseled a number of people lately who, suspecting that they had to pay taxes, didn’t file their returns – for years.
The Internal Revenue Service has finally caught up with them, and now they are facing possible tax liens. They never attempted to contact the IRS or any professional to discuss their options. They just didn’t file.
“Why?” I asked.
“Because I was afraid,” was the usual answer.
If you’ve done your tax return and realize you owe but can’t pay, the worst thing to do is nothing.
The interest on unpaid tax debts is compounded daily and is charged from the due date of the return.
The interest rate the IRS charges is the Federal Reserve’s benchmark short-term rate plus 3 percent, which these days means 8.25 percent.
At least file your tax return even if you can’t pay the full or even a partial amount. That’s because the total penalty for failure to file and pay can be 47.5 percent (22.5 percent for late filing, 25 percent for late payment) of the tax owed. Filing would at least save you the 22.5 percent portion of the penalty.
This time of year, companies prey on individuals who either have not filed and owe, or have filed and can’t pay. These firms make promises that they can get the IRS to settle your tax debt for a fraction of what you owe.
In the majority of the cases, this is just a deception. Essentially what these promoters do is have you apply for what’s called an offer in compromise, or OIC. This allows the IRS, under certain circumstances, to accept less than the full tax payment.
An OIC is tough to get. Last year the IRS received 59,000 requests for offers in compromise, but only 15,000 were granted.
You have to be experiencing some unusual economic hardship to qualify.
You are expected to exhaust all ways to pay your tax bill, including liquidating any assets and bank accounts. You also have to pursue all other payment options.
Instead of contacting one of those promoters promising to get you an offer cutting your tax bill to pennies on the dollar, go through the checklist in IRS Form 656 “Offer in Compromise” to determine if you are eligible. There’s also a worksheet – you can fill it in online at irs.gov – which is not too complicated and can help you determine how much you would be expected to offer.
If you cannot pay the full amount due as shown on your return, ask to make monthly installment payments. You’ll have to pay a one-time fee of $105. To request an installment agreement, use IRS Form 9465 “Installment Agreement Request” with your return. You should receive a response within 30 days.
Contact Michelle Singletary at singletarym@washpost.com or c/o The Washington Post, 1150 15th St. NW, Washington, DC 20071.
