While filing a return can be difficult enough for a business owner, being able to pay those taxes can be an entirely new problem to tackle. If you’re in a financial situation where you’re unable to pay your tax bill in full, there are steps you can take to defer or otherwise adjust your tax obligations.
A payment plan, or an installment agreement, is an arrangement with the IRS to pay the outstanding taxes in full on a determined schedule.
Payment plans are available to both individuals and businesses. If you file as a sole proprietor or independent contractor, you can apply for a payment plan as an individual.
If you are able to pay your tax obligations in full, but just need a bit more time, you can apply for a short-term payment agreement, which provides up to 120 days to pay in full. There’s no additional fee to set this up, but interest and any applicable penalties will continue to accrue (you may avoid the failure to file penalty though). You apply online using the IRS’s Online Payment Agreement application, attaching Form 9465 to your tax return, or by calling the IRS directly. If you apply online, you’ll immediately receive a notification if your application was approved.
Only individuals (sole proprietors and independent contractors) can apply for the short-term payment plan.
Monthly installment agreement
If you need more time to settle your tax bill, you may be able to enter into a monthly payment plan with the IRS. A setup fee will be charged, but low-income taxpayers may qualify for an exemption. Keep in mind penalties and interest will continue to be added to your tax balance until the tax debt is paid off.
The IRS offers two types of monthly payment plans: Manual Installment agreements and Direct Debit Installment Agreement.
For a manual installment agreement, you send a check directly to the IRS every month (typically the IRS will provide you with a voucher). With this type of installment agreement the fees are higher than a Direct Debit Installment Agreement.
With a Direct Debit Installment Agreement (DDIA), the IRS will set you up on a monthly payment plan that will directly come out of your bank account. The fees are typically lower than a manual payment.
As an incentive for setting up a Direct Debit Installment Agreement (DDIA) the IRS will cut the “failure to pay tax penalty” in half (0.5% per month to 0.25 % per month).
If this strategy is one you’d like to pursue, you will need to determine and propose a monthly payment amount, taking into account your expected cash flow, liabilities, and assets. An experienced tax resolution specialist will be able to help you negotiate the lowest possible repayment arrangement acceptable to the IRS. Depending on your situation, they may be able to help you enter into a Partial Payment Installment Agreement (PPIA). A PPIA lets you pay a lower monthly payment plan based on your financial situation.
Temporary delay in collection
If due to your current financial situation, making a tax payment would cause a financial hardship that would prevent you from meeting your basic living expenses, the IRS can suspend collection on your account until your financial situation improves. This does not remove your tax obligations, and penalties and interest will continue to accumulate.
This relief strategy will require some more steps. You’ll need to collect a list of your assets such as bank accounts, vehicles, and equipment, as well as your business income and expenses. You may need to request this status on Form 433-H or 433-A. This will depend on your situation. For either form, excellent bookkeeping and good records are necessary.
If your request is approved, the IRS may still file a tax lien against your property in order to preserve a legal claim, but they will suspend collection actions such as issuing a levy to actually take your assets.
Offer in Compromise (OIC)
In certain cases, you may be able to negotiate with the IRS to reduce your tax bill. This is a fluid process, where the IRS will consider a variety of factors, such as your assets and income, your debts and expenses, and your general ability to pay. If an agreement is reached, you’ll enter into an Offer in Compromise (OIC), where you’ll settle your tax bill for a smaller amount.
To be eligible for an OIC, you’ll need to have filed all required tax returns, made all required estimated tax payments for the current year, and made any required federal tax deposits for the current quarter if you have employees. The IRS has an online tool to see if you may be eligible for an OIC.
The application will involve completing Form 656-B. There is a $205 application fee, but low-income taxpayers may qualify for an exemption. You’ll also need to make an initial lump sum payment on your outstanding tax liability.
If you’re considering this settlement method, we strongly recommend enlisting the help of a qualified tax resolution specialist that is licensed to represent you with the IRS, as the process is often complex, and an experienced professional can help you arrive at a satisfactory resolution. The negotiation usually takes longer than setting up an installment agreement.
If you enter into an OIC with the IRS, you’ll either pay off your taxes in several lump sum payments over five months, or make monthly payments over 24 months.
If your offer is rejected, you have the right to appeal the rejection within 30 days of the rejection letter.
Further reading: Tax Resolution (What You Need to Know)
What about business tax debt?
The IRS handles business tax differently than personal tax debt. If the debt is payroll debt, this may require special handling of an expert. We highly advise you to get a tax specialist, such as a Tax Attorney, to help handle the situation.
If the business payroll debt is under $25,000, the business can sign up for a In-Business Trust Fund Express Installment Agreement with the IRS. For tax debt that is higher than $25,000, we recommend seeking a tax specialist.
For other types of business debt, the IRS will require that you fill out Form 433-B. Form 433-B requires information about your business’s assets, income, and expenses. The IRS will use your profit and loss section of Form 433-B to determine a payment plan to pay off the business debt. Filling out this section accurately is crucial, but made easier with good bookkeeping and recordkeeping.
Why should I file my tax return on time?
No matter which option you might end up using, you should still make it a priority to get your tax return filed on time. By filing your taxes on time, you’ll avoid the “failure to file” penalty, which starts at 5% of your unpaid tax. Once your taxes are filed, you’ll have a bit more breathing room to sort out your bookkeeping and finances.
Due to the statute of limitations, filing your taxes on time or as soon as possible also starts the clock for how long the IRS may collect on the tax debt, audit and follow up on some other tax debt relief such as bankruptcy. The sooner you file taxes, the sooner you can stop thinking about the IRS.
Note that interest and monthly late payment penalties accumulate until your balance is fully paid, which is why the IRS recommends that you pay as much as you can first before proceeding with these strategies, so less interest will accumulate.
What if I have years of unfiled tax returns as well?
The IRS won’t let you get very far with the tax deferral process if you have unfiled tax returns.
Many businesses who are in this situation can feel overwhelmed because they don’t have the right financial documents they need in the first place in order to file. Oftentimes, the solution is to start with historical bookkeeping in order to catch up on your books.
Further reading: How an IRS Audit Works (And How to Prevent One)
If you’re interested in getting some help with this, Bench has a team of bookkeeping and tax experts that can help you through the entire process, as well as connect you with a reputable tax resolution specialist once your business is ready to sit down with the IRS. Get help.
Can I just do this myself?
Yes, the IRS has online systems and processes, so it’s possible to apply on your own in some situations. However, most businesses will benefit from the guidance of a tax professional, especially those with more than one year of unfiled taxes, or those with a significant tax bill. Every situation is unique, and having an experienced specialist on your side will help you end up with the best possible outcome.
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