1. Temporarily delay the collection process
The first step you should take to give yourself some peace of mind is apply to delay the collections process. If the IRS determines you can’t pay your tax debt, they will report your account as uncollectible and hold off on collecting your debt until your financial standing improves.
Unfortunately, a temporary delay of the collection process does not stop penalties or interest from accumulating. The 5% failure to file penalty and 0.5% failure to pay penalty will apply to the outstanding amount.
If you successfully apply for a temporary delay, the IRS halts their tax collections moves. This protects you from federal tax liens and tax levies.
Temporary delays are not a perfect solution, but it can buy you more time to sort out unpaid taxes without worrying about the IRS coming after your assets. This time can be spent looking into some of the other options on this list.
2. Apply for a payment plan
For tax debts under $50,000, a payment plan or installment agreement breaks down your total tax debt into manageable payments. As part of the application process, you will work with the IRS to determine a reasonable monthly payment and a timeline for paying down the debt.
Short-term payment plans are available for debts that will be paid off in 180 days or less. The main benefit of a short-term payment plan is the IRS does not charge a set up fee. The only extra cost under this plan is the 0.5% failure to pay penalty which still accumulates.
Long-term payment plans are called installment agreements and last longer than 180 days. The set up fee ranges from $31 to $225 depending on how you apply and how you plan on paying. Low income individuals can have the fee waived or reduced.
With a payment plan, penalties and interest still accumulate as you pay down the balance, but the IRS’s time to collect is suspended and you won’t be subject to tax levies.
Further reading: How the IRS Tax Payment Plan Works (And What You Need to Apply)
3. Reduce amounts with penalty abatement
If it’s your first time filing late or being penalized by the IRS, you may be eligible for penalty abatement—also known as one time forgiveness.
Penalty abatement means the IRS will waive any accumulated failure to file, failure to pay, or misreported information penalties (but interest still accumulates). This is a great way to reduce the amount you need to pay so long as you have a history of being in good standing with the IRS.
The criteria you must meet to be eligible include:
- Being up-to-date on filing all tax returns.
- All prior taxes not including the year you are applying for have been paid or have an installment agreement.
- Having no prior penalties in the previous three years.
If you successfully have your penalties abated, it’s best to pay down the debt as soon as possible. The IRS moves the due date of your payment to the date of the request meaning failure to pay penalties start accumulating again from that new date. These new penalties will not be eligible for abatement.
4. Look into an offer in compromise
Businesses that aren’t confident they can pay the owed amount in full should consider an offer in compromise. While it’s difficult to qualify, successful applicants will settle on an acceptable, alternative amount to pay to the IRS.
The process includes submitting an offer that you believe you can pay while providing supporting documents that support your claim. Potential documents include financial statements, forecasts, and bank statements.
Once your offer is submitted, the IRS either accepts it or provides a higher alternative. Once the higher alternative is offered, you will not be able to provide any more documents or come back with a counter offer. Because of this, it’s best to work with a tax professional with prior experience to help you make the best claim possible.
5. Seek advice from a professional
For tax debt that feels insurmountable, talking to a professional can alleviate some of the stress. Some tax professionals offer free consultations to better understand your situation before working with you. These consultations are great opportunities to get some free insight on what your options are.
While working with a tax professional comes at a cost, some business owners will save more than they spend. Their insight on tax law may reduce penalties, avoid accumulating interest, and get fees waived to minimize the impact on your cash flow.
The bottom line
Leaving the stress of unpaid tax debt behind is within reach. Whether by using one of the IRS’s programs or working with a third party, it’s possible to reduce your tax debt in a way that works for your business.
Regardless of how you tackle your unpaid debt, a helping hand saves you from digging through information and navigating applications for the relief options available to you. Working with a tax professional doesn’t just get you expert advice, but they’ll even represent you in front of the IRS.
With Bench, we help you reset your bookkeeping and taxes to get your business’s financial reporting back on track. If your business is falling behind, treat it to our team of experts to get caught up and in the clear for today and beyond.
