When summertime is in full swing in Southern California, taxes may be the furthest thing from many residents' minds. But for those who owe money to the Internal Revenue Service, taxes can become a year-round preoccupation. Since penalties and interest on tax debts can quickly swell the total amount owed, it is important to reduce and eliminate one's debts as quickly as possible.
Fortunately, taxpayers have a number of options, as outlined in a recently released summertime tax tip from the IRS. As we have had occasion to mention in prior posts, some people who are unable to pay the whole debt at one time may be eligible to enter an installment agreement or an offer in compromise. An installment agreement spaces one's payments over months or years, making the debt more manageable. By contrast, an OIC allows taxpayers to settle their debt with the IRS for less than the total amount owed.
Taxpayers must meet certain criteria before being allowed to enter either program. For example, the IRS will not accept an OIC if its calculations show that the taxpayer could pay off the entire debt. Over the past few years, however, the IRS has relaxed some of the criteria under its Fresh Start program in recognition of the difficult economic circumstances many people have experienced during the recession.
The IRS also offers a number of ways taxpayers can arrange to pay their debt. For those who want to make automatic payments to the IRS, they can modify their Form W-4 to have additional money withheld from their paycheck. In addition to checks and cashier's checks, the IRS also accepts money orders and electronic funds transfers. It is always a good idea to document payments in case a dispute arises regarding whether the IRS received the payment.
In addition, the IRS suggests that a person may want to get a loan to pay off any tax debt in full because the interest on the loan may be less than the total penalties and interest the agency assesses against the taxpayer. Before engaging in this strategy, taxpayers should thoroughly consider all their options for repayment and ask whether this financial arrangement makes sense in their case.
Source: NJ Today, "IRS Tax Tip: Eleven Tips For Taxpayers Who Owe Money To The IRS," Aug. 3, 2012.
• It is important that taxpayers find the tax debt repayment option that best fits their financial situation. If you would like more information on my firm, please visit my Irvine installment payment plan page.