8 Things to Know About Divorce and Taxes
If you’re filing for divorce, or find yourself recently divorced, it’s imperative that you understand how your changing marital status...
In the event you can’t afford to pay your tax bill, in most cases, the IRS will agree to work with you to set up a payment plan so the liability can be paid off with minimal hardship. Note, whether or not you think you will be able to afford the tax bill, you should still file your return as the IRS can charge late payment penalties for not doing so. The IRS also charges daily interest on unpaid tax bills, so the longer you wait, the more interest you will owe. If you have another way of getting money, like borrowing from a bank or an individual, it’s worth considering. The interest rate and fees charged by a bank or credit card company are usually lower than the combination of interest and penalties imposed by the tax code.
If you can’t pay in full immediately, the IRS offers additional time (up to 120 days) to pay in full. It’s not a formal payment option, so there’s no application and no fee, but interest and any penalties will continue to accrue until the tax debt is paid in full.
In the event that more than 120 days will be needed to make payment, monthly installments will be necessary. If you will not be able to pay the full amount you owe, the IRS may accept an Offer in compromise. An application process and fees will apply in both of these scenarios.
An offer in compromise may be accepted if there is doubt as to collectibility (taxpayer does not have sufficient net assets to make payment), Effective tax administration (taxpayer has funds, but would cause economic hardship) or Doubt as to liability (claim for tax owed is incorrect).
There are two payment options for an offer in compromise:
Lump sum offer - Generally, you'll be required to pay 20 percent of the total amount you're offering when accepted. You’ll need to pay the rest in five or fewer payments, within five or fewer months of the date the offer goes into effect.
Periodic payment offer - Generally, you’ll make the first payment when you submit the offer and the rest within 24 months, according to the terms of your offer.
For the IRS to accept an offer, you must file all tax returns due and be current with estimated tax payments or withholding. Submitting an offer starts the process of evaluating your situation, your ability to pay, and the amount you're offering. Not all offers in compromise get accepted.
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