They say there are two things you can be certain of in this life: death and taxes. Unfortunately, with taxes, comes the possibility of tax debt. It is all too common for people to find out they owe more in taxes than they have paid into the system. Even more common, is not having the funds available to pay this tax debt. In this situation, knowing available tax debt options is key to finding a workable solution.
Tax debt is often the result of filing taxes past the due date or paying the taxes due late. April 15th is the annual deadline for filing and paying federal taxes. If a payment is received late or not received at all, the IRS will charge a hefty penalty on the amount that is owed. Filing late equals a point 5 percent fee and, worse yet, late payments are charged another 4.5 percent fee. Together, these fees combine to an interest rate of 5 percent.
These fees will continue to accrue until the interest equals 25 percent of the net amount owed. If the tax debt remains unpaid after a period of five months, the interest rate will continue to accrue at the rate of point 5 percent. This means that the taxpayer will potentially owe considerably more than the cost of the initial tax debt.
In cases where the person does not respond to correspondence sent by the IRS regarding late payment, other actions, such as liens and levies, can be taken against the taxpayers personal property. With a lien, the government can take possession of physical assets until repayment of the tax debt is satisfied. However, they can only seize control of the assets that equal the debt owed. This option is extremely difficult for many filers to deal with, especially because it can have a negative effect on their credit rating.
A levy is similar to a lien except that with a levy, the government has the option to auction off the taxpayers personal property to reimburse the government for the tax debt owed. With a levy, the IRS can also file a levy against a taxpayers future earnings or their state refund if they are going to be getting one.
These penalties can wreak havoc on a persons financial situation. Therefore, many people request tax debt relief, because they do not have the available funds to pay off the entire sum. Luckily, there are options available to those in need of tax debt help.
The Offer In Compromise is one of the most appealing tax relief programs available to filers, who cannot manage their tax debt. In fact, it is the only program the government offers where the filer ends up paying less than what they owe. There are three ways in which this particular tax debt settlement program functions. The first two are monthly installment programs. In one version, the filer would pay a monthly fee to the government for a period of 24 months. In the other monthly option, the filer would pay a monthly fee to the government until the statute of limitations on their tax debt expires. The last option is to pay a lump sum to the government, which could cover a significant portion of what is owed.
While this offer is terribly enticing, only a small percentage of the population is eligible for this program. It is a good idea to contact an accountant before applying to see if eligibility requirements can be met. The Offer In Compromise is mostly reserved for those in great need. It is free to receive and review the application, but there is a $150 fee to file an Offer In Compromise. Unfortunately, paying this fee does not guarantee that the taxpayer will be accepted into the program.
Of course, finding ways to prevent tax debt in the first place is always advisable. One of the best ways to do this is to pay more taxes throughout the year. Employers take out taxes based on the number of dependents the employee claims. It may be a good idea to have the employer take a few extra dollars out of each paycheck. They can do this with the employees permission by lowering the number of dependants being claimed or by subtracting a set amount.
A self-employed person might want to use the services of an accountant to determine how much money to set aside each month for taxes to be paid at the end of the year. Paying taxes quarterly instead of annually can also help a taxpayer manage their tax debt, and may even result in a reduction of the amount owed.
The IRS takes tax debt very seriously. The penalties for late or non-payment can be very severe. It is best to avoid these types of mistakes if possible. However, if a person is unable to pay the taxes owed to the government on time, it is imperative to open a dialogue with them. The IRS cannot offer tax debt relief or tax debt reduction to people who hide from them. Take advantage of any help the government offers and then take steps to avoid similar situations in the future.