You receive the news many of us hate to hear – you owe the Internal Revenue Service (IRS)! So what should you do?
First Things First
Understanding why you owe is the first key to your success. For instance, was your return filed accurately? Are there more deductions you are able to take? Is the amount owed due to penalties imposed by the IRS?
If you are deemed to owe a balance due on a past tax return, have a tax professional or certified public accountant (CPA) to review your tax return for accuracy. Often times, many deductions are overlooked and as a result, the taxpayer may owe more than necessary. In addition, certain penalties can be waived if the taxpayer shows reasonable cause. It is also a good idea to review the prior three years of tax returns to determine whether the tax liability could be reduced or tax refund increased. This could help offset any amounts currently due.
After you have reviewed your tax return and still unable to reduce your tax liability, there are payment options available to you.
The IRS will allow you to set up an installment agreement for balances less than $50,000. The agreement allows individuals to pay a set amount monthly if you are not in a financial position to pay the entire amount. Keep in mind, there are fees associated with setting up an installment agreement and penalties and interest may still accrue during the agreement.
Pay Pennies on the Dollar
You hear it all the time in advertisements, but is it really true? The IRS will allow you to settle your debt for pennies on the dollar, but you must qualify! Just as the name implies, you can offer the IRS an amount and it will compromise the rest.
However, you must show that paying the debt would cause a financial hardship and you can’t afford to pay the full tax liability. You also have to prove your inability to pay through providing your financial information, such as the amount of income and current expenses. In addition, you have to disclose your assets equity (which is determined by subtracting your liabilities from your assets). For more information, visit IRS.
Remember: your choice your future!
Kemberley Washington is a certified public accountant and business professor at Dillard University. Follow her on Twitter or connect with her on Facebook. For more personal finance and tax tips, subscribe to her blog at kemberley.com.