How to Eliminate Your IRS Tax Debt and Best Ways to Avoid a Penalty – Beauty Cooks Kisses

You’ve found out you owe the IRS and now what do you do? First don’t panic and try to find out what the problem was and correct it to avoid an IRS penalty and begin to eliminate that tax debt. If you can borrow the money and pay the IRS balance before the due date you won’t have a penalty or interest. However, if can’t do that there other options.

Understanding Your IRS Debt

Most of the time it’s because your withholding was set to low. The W-4 form you give your employer tells them what to withhold and send into the IRS. You may have income from other sources like some self-employment income and it doesn’t have withholding. On that W-4 you can have additional amounts taken out of your W-2 job with each paycheck. Ideally you break even at the end of the year. Your paycheck has just enough withheld that you don’t owe anything and your paycheck is right where it needs to be with withholding. That rarely happens since everyone seems to want a large refund.

Sometimes you don’t know what you income will be and you chose to err on the side of caution. The IRS has a publication 505 that covers this because they don’t what you to find yourself in a financial hole with them. Nonetheless, if you are in that hole, the first rule is to stop digging. The IRS has a tool called Tax Withholding Estimator right on irs.gov. Anyway, if you can’t figure it out call IRS at 1-800-829-1040 and ask for the Calculating Withholding area and they will help you with the W-4 form.

Occasionally you do need to make estimated tax payments during the year. For example, you are going to have a tax bill of more than $1,000 then making quarterly payments is something you need to do in most cases. If not, they will hit you with a penalty for failing to make adequate estimated tax payments. Remember the IRS has a pay as you go system or as you make the money you should be paying the tax. When you are W-2 employee you have taxes withheld most of the time. If you have investment or self-employment income, you may not be doing that. Face it the government is just like you in that they want the money to come during the year as you earn it. You wouldn’t let your employer wait to give you your paycheck December 31 would you?

Exploring Penalty Abatement Options

Ok so owe the IRS and sometimes you can ask for forgiveness. Over the phone you can ask the IRS person to abate the penalty. But you have to ask, they won’t volunteer to do that, they aren’t allowed! Some penalties they can’t and you would have to write in with Form 843 to ask for that. And interest that’s mandated by congress and the IRS agent over the phone can’t help you with that either. But you can ask for the failure to pay and the failure to file penalties removed.

Failure to pay the penalty is just that, you didn’t pay and the IRS will hit you with a penalty. You may have an excuse that will allow that to be removed. Also, for failure to file and failure to pay penalties there is also the “First Time Abatement” that can be done. It’s more that just a one time thing. The IRS agent will run a tool that they are mandated to run to abate penalties. If you have a good record of compliance, you pay your taxes and have accrued a penalty, even a small one, then the failure to pay and failure to file may be eligible to be removed under fist time abatement. They look at three years so don’t go asking for this every year.

As for failure to file penalties, that’s based on taxes not paid by the due date. If you are getting a refund you can be late and not get penalized. Just don’t wait like four or five years to file the return or you will find the IRS won’t issue the refund due to statute restrictions limiting the time IRS can refund anything. Generally that time is three years for refundable credits or two years after you pay the tax.

Now if you do have failure to file penalties you may not need to burn that first time abatement if let’s say you filed an extension with Form 4868 and you filed it under the wrong SSN. For example, you filed under the secondary taxpayer’s SSN. Again you have to ask the IRS to fix this and this is easy for them. Once they see that it’s a simple input of a transaction code under the primary taxpayer’s (the person listed first on the return) SSN. Another thing can happen if you file for an extension every year and just this year it never made it. Who knows maybe it was eaten by the postal machines, whatever or maybe your preparer swore he mailed it. Again you have to ask the IRS to abate it. This isn’t 100% going to happen in your favor. But the IRS rep will look at the scenario of “more likely than not” did this person really file an extension?

So you’ve exhausted everything and you still owe the IRS but hopefully you’ve fixed everything so this never happens again. Nobody wants to owe the IRS and the IRS doesn’t want you to owe either. They want revenue, not debts they have to chase after. So calm down and call them. You have options that are less painful than you think.

Navigating IRS Payment Options

There is a short term payment plan for up to 180 days. This one is open ended in that you aren’t agreeing to pay every month a certain amount of money. They just want it paid off in 180 days or less. If you strive to pay it off as soon as you can you will owe less since the penalties and interest accrue on any unpaid balance and if you can pay it off as soon as you can. Furthermore, if you can abate the IRS penalty and are successful you can revisit that until it’s paid off or even after.

If you need more time to pay there are installment agreements. If you are low income, the user fee which doesn’t exist on the short term agreements will be lower for you. Nevertheless, if you want the payments to be pulled from your bank automatically that user fee will be less as well. If you set this up yourself on irs.gov, the installment agreement user fee will be lower. Yet, remember there is no user fee on 180-day agreement. Both accrue penalties and interest. Only the installment agreement has that user fee. So calling in and having the IRS rep set up the short term agreement is fine and won’t cost you anymore. But the installment agreement user fee will be higher if the IRS sets up the installment agreement.

The IRS processes refund returns first since they only have a certain amount of time before the IRS has to pay interest so they wait until mid-May before sending out balance due notices. You can stretch the 180 days for the short term agreement by waiting for the notice. You still want to try keep sending in payments since that lessens the impact of any IRS penalty and interest. If you strive to pay it off as soon as you can you will owe less since the penalties and interest accrue on any unpaid balance. Still, if you can abate the IRS penalty and are successful you can revisit that until it’s paid off or even after.

But if you are over your head with IRS debt don’t ignore it. Eventually collections will start calling. They can levy bank accounts, put liens on property, or maybe garnish wages. Also, if your withholding is to low all the time withholding compliance can tell your employer to set you withholding the maximum rate. Or maybe you are in bankruptcy.

One thing you should do cautiously is hire one of these companies to settle your debt. Sure maybe the company is a good one. We all see the late night ads on TV making big promises. But the IRS has one this called Offer In Compromise. They even have an prequalifier tool for OIC. Just put OIC into the search box and it will come up in a search. There’s a fee you have to pay and an initial payment. But before you plunk down a lot of money to some 1-800 number person just call the IRS and get your options. Trust they don’t want you to owe either.