In A Christmas Carol, Ebenezer Scrooge shows no mercy towards the poor who were incarcerated for being unable to pay their debts. In Colonial Williamsburg, debtors were jailed alongside people arrested for serious crimes. Fortunately, we no longer lock up folks who can’t pay their debts, even if that obligation is to the IRS. In fact, the IRS has several options for handling an unpaid bill from them. You can get more information here or simply keep reading for a summary.
If you know you’re going to owe taxes that you cannot pay, it is still important to file a timely return. This will prevent the Failure to File penalty (5% of the amount owed, imposed each month until a total of 25% is due) and protects the right to claim certain credits and carryovers that are lost if a return is not filed by the deadline.
If you’ve filed a return with an amount due that you cannot pay, you should assess how quickly you can take care of the responsibility. Regardless of the option you choose, you will be liable for the full amount of tax owed, plus interest on the unpaid amount until paid, along with a Failure to Pay penalty (normally 0.5% of the unpaid amount but reduced to 0.25% if you’re in an approved payment plan). There is no fee to set up a short-term plan.
Alternatively, if you know you can pay the balance off within a month or so, you can simply pay when you can and the IRS will send a letter summarizing the additional fees you owe.
If your tax bill is more than you can pay off within the short-term time frame, you can apply for a payment plan. Plan details, and fees, vary depending on the amount owed and the timeframe requested. Most taxpayers will fall under the new Fresh Start initiative, which allows up to 70 months to pay balances less than $50,000. In general, it’s most cost effective to set up the installment agreement online and to choose the option to have the IRS directly debit your bank account for the agreed-upon amount on the date chosen each month. We are happy to assist our clients who wish to set up a payment plan.
Those late-night commercials offering to settle tax debt for pennies on the dollar are utilizing the Currently Non-Collectable or Offer in Compromise options (taxpayers provide detailed financial information to show that they do not have a realistic chance of paying off the debt). These are serious actions that come with lasting consequences, so they should only be pursued with professional assistance from trusted sources.
And what about state taxes? Depending upon which state you owe the answers vary, but North Carolina also offers a payment plan. However, you should make compliance with the North Carolina agreement a priority since defaulting on the plan has consequences that are even more severe than those imposed by the IRS.
No one likes being in debt, but at least anyone who owes the IRS (or the NC Department of Revenue) has options to handle their accounts that don’t involve landing in jail, and that makes us merry indeed!
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