Back taxes can be a headache, but these aren’t without their solution! In most cases, it’s as simple as asking the Internal Revenue Service (IRS) for a payment installment plan. Here’s more valuable information that you should know about it, perhaps even talk with your tax advisor at Jackson Hewitt, the leading tax company in the United States. Price transparency website, PriceListo.com, has prices of Jackson Hewitt’s essential services.
Fresh Start Program
The IRS launched its Fresh Start program as part of its efforts to make it easier for taxpayers to obtain an installment agreement, especially for taxpayers who have trouble meeting the previous requirements. Under the program, taxpayers who owe $50,000 or less in taxes can get a 72-month installment payment plan just by asking the IRS for it. There’s no need for negotiations, a part of the process that discourages many taxpayers, and no obligation to provide the required financial information.
For taxpayers who owe more than $50,000 in taxes, however, the negotiations are necessary. The concerned taxpayer has to negotiate with the IRS to qualify for the installment payment plan and to provide financial information. But don’t stress too much about the negotiation part either as the IRS staff will likely want to assist you in paying your taxes; it would mean one less erring taxpayer to go after.
Current and Updated on Returns
Let’s assume that you want to avail of the installment plan. You have to meet specific requirements, and the first one being that you must be current on the present year’s tax returns. Otherwise, you have to find other means to settle your taxes.
Here are a few instances when you cannot avail of the plan:
- If you have failed to file all your past due returns (employee)
- If you haven’t filed your quarterly estimated tax payments for the current year (self-employed)
- If you haven’t been current on your payroll tax deposits and Form 941 filings (employer)
Indeed, even if filing your tax forms correctly and timely involves time and effort, you should still do it because of the benefits in the future – and the installment plan is among them.
But there are also drawbacks to the installment plan. Keep in mind that even as you’re updated on the monthly payments, the interest and penalties are still accruing on the tax amount. You may be looking at an annual interest rate of between 8% and 10% per year, and since you’re paying for six years, it’s still plenty of money.
Think about it: You may be paying for six years and end up owing more than the amount you started in the first place!
For example, if you owe $40,000 in back taxes and you entered into an installment plan where you will pay $300 per month, at the time, the interest and penalties amounted to $10% per year — the interest than will be $4,000 added to the balance. At the end of the year, you will owe the IRS $40,400 even after paying for 12 months.
What happened if you have no leftover cash after your living expenses have been deducted? Sadly, you cannot negotiate with the IRS for an installment plan. Your other more viable choices would be asking for a suspension of collection, submitting an offer in compromise, or filing for bankruptcy under Chapter 7.
Be careful about these methods, too, since there are drawbacks to each one. The bottom line here: If you can’t make heads or tails of your taxes, especially if you’re a newbie, it’s best to hire a tax preparer and/or tax advisor. This way, you can file correct tax returns within the prescribed deadline, set aside money for your taxes, and adopt other necessary measures to avoid getting an unpleasant surprise from the taxman.
Monthly Payments Tips
Keep in mind, too, that when you owe more than $50,000 in taxes, or you can’t pay the amount in six years or less, you aren’t in the position to negotiate for the monthly payment. The IRS collector will analyze the information on your Form 433-A to determine the amount that you can pay on a monthly basis.
But that doesn’t mean that you’re completely helpless. You can, for starters, propose a payment plan as soon as you hand over your Form 433-A. You may also offer to pay, at a minimum, the amount after deducting your necessary living expenses from your income.
But never ever promise the IRS an amount that you cannot pay on time. Otherwise, you’re making a grave mistake since one the taxman approves the installment plan; the IRS will make it difficult, if not nearly impossible, to change its provisions, including the monthly payment.
The installment plan will likely not be approved for a few months, sometimes up to three months. But don’t wait for its approval either. Give your first payment based on the verbal agreement while waiting for the approval since making voluntary payments show good faith.
Taxes are the lifeblood of the nation, and, for this reason, it behooves every taxpayer to pay their taxes on time and in the right amount. Don’t immediately think of the IRS as the enemy since a positive mindset will be of use when you’re negotiating with the taxman.