Whether the economy is in a slump or your business hits a rough patch all its own, you may someday find your business has a federal tax bill it can’t pay. There’s a right way to handle this situation and a wrong way.
If you don’t file a tax form and don’t pay the tax it will only increase your debt, as the Internal Revenue Service will assess fines and penalties when the debt is discovered. The IRS is legally entitled to pursue collection of the debt forever; the debt will never expire or be canceled. This will likely have a negative impact on your credit rating and make it difficult for you to borrow money in the future.
Instead, let the IRS know you have a problem right away, ideally well before the tax deadline. Depending on your situation, you have three options to resolve the problem.
Get an Extension
If you don’t have the tax money you need now, but will have it within a few months, request a short-term payment extension. This gives you up to 120 days to pay the tax in full. This is the best way to deal with the problem because there is no upfront fee for the extension itself, and it adds the least amount of interest and late-payment penalty charges to your debt.
Propose an Installment Plan
The IRS offers payment plans to taxpayers who can’t pay their taxes on time but can pay a portion of the tax on a monthly basis until it is paid off. You can propose an installment agreement by filling out IRS Form 9465, online from the IRS.
Submit as much of the tax owed as you can with your application form. Then make your monthly payment as large as you can manage because the IRS charges interest and fees each month until the debt is paid off. The interest rate, set by the IRS, varies from year to year. You will also pay a onetime user fee of roughly $50 to $100. If you apply online, you may be able to get a quick response to your installment plan proposal.
For debts over $25,000, you also need to fill out and send Form 433-F. This form asks you to list your assets, including bank accounts and real estate owned.
Request an Offer in Compromise
If you can’t pay your taxes on time and think you will likely never be able to pay what you owe, you can offer to settle the debt for a smaller amount. The IRS will only accept a compromise offer if it concludes you cannot pay your tax in full now or pay it off in installments.
The IRS examines several issues to determine whether you are eligible for an offer in compromise. Valid reasons to accept an offer include the following:
- It’s doubtful you could ever pay the full amount.
- It’s unclear whether the tax you’ve been assessed is correct.
- There are exceptional circumstances that hamper your ability to pay. For instance, you’ve become disabled and now cannot work, or you have funds but need them to care for a disabled family member.
To make an offer in compromise, you must submit a $150 fee along with Form 656. You may offer to pay the proposed settlement amount in a lump sum over five or fewer months, in monthly installments over 24 months, or over a longer period. The IRS may accept your terms or propose alterations to your offer.
Once you’ve negotiated an installment plan or offer in compromise, be sure to make all required payments on time. Otherwise the IRS can cancel your deal and demand immediate payment in full.
Business reporter Carol Tice contributes to several national and regional business publications.