How to Negotiate With the IRS
You do need to file your taxes this year, even if you're afraid you can't pay.
It's that time of the year again: tax season. With the April 15 personal tax filing and payment deadline coming up, you may find yourself in the frustrating position of owing more in taxes than you can currently pay. If that's the case, don't despair; there are multiple ways you can negotiate with the Internal Revenue Service (IRS) to help resolve your taxes. Here's how to get started.
Whatever you do, file—on time.
The most important thing the IRS and tax professionals agree on? It's that you shouldn't ignore the filing deadline, regardless of your ability to pay in full. That will only drive up your total debt thanks to fees and interest.
Both the IRS and the tax professionals I spoke with urge taxpayers to file their taxes as early as possible; waiting until the evening of April 14 could mean a rude awakening if you weren't expecting to owe money—or if the amount you owe is greater than your current savings. The earlier you prepare your taxes, the sooner you'll know whether you're owed a refund (which, according to Raphael Tulino, spokesperson for the IRS, applies to 70 percent of taxpayers) or whether you owe money.
And you should definitely file your taxes, even if you can't pay your balance in full. There's a penalty for not filing (and separate penalties for late payment), and as stated on the IRS website, "Filing and paying as soon as possible will keep interest and penalties to a minimum."
Tulino emphasizes why it's advantageous to file your taxes even if you don't have the full amount available to pay when you file. "If you have a requirement to file and you have a balance due, and you don't file that return and leave that balance due, that penalty is much greater than filing a tax return and not full paying," says Tulino. He says being proactive "is always a good thing" when it comes to your taxes. "We're flexible and we can work with you," he notes. If you can pay a portion of the amount due, paying it will help reduce your total tax liability. Even a small payment is better than nothing, though if you can't afford a small payment, you're still better off filing your taxes than not filing.
Tulino recommends contacting the IRS via its website, irs.gov, because you'll be able to get the fastest response. Other options are calling, though you may experience long wait times when you call, or making an in-person appointment. The IRS website offers guidance for those who can't pay their taxes in full, including four main options: online payment agreement, installment agreement, delaying collection and offer in compromise. Getting access to the IRS by phone can be challenging, especially during the pandemic, when you might face long wait times, so make use of the tools and information available on the IRS website.
Work on a payment agreement.
According to financial advisor Trent D. Porter, CFP, CPA, "As soon as you know you will not be able to pay your tax liability in full, you should be working with the IRS to arrange a payment agreement." Once you're aware that you'll have an issue paying your taxes, "your next step is to figure out your best plan of action to pay those taxes," he says.
Porter advises that if you're applying for a payment agreement or offer in compromise, "the IRS will need to know all of your financial information. Have ready your prepared tax return, paystubs, lease or rental agreement, mortgage statements, car loan statements, utility statements, credit card, and other debt statements, as well as your bank statements."
For those suffering financially because of the Covid-19 pandemic, the IRS has made key changes that may be helpful. For instance, its short-term payment plan option timeline has been changed from 120 days to 180 days. If you know you'll be able to pay your taxes in full within 180 days, this may be a good option for you. Tax attorney Beverly Winstead says there are many aspects of negotiating with the IRS you can do yourself, but there are some situations where a professional can help. If you owe $10,000 or less, Winstead, who also serves as director of the Low-Income Tax Clinic at University of Maryland School of Law, advises you're probably better off contacting the IRS directly.
Your situation is unique.
For those who owe more than $10,000, an experienced CPA or tax attorney could be advantageous in working out a plan with the IRS on your behalf, because they have experience dealing with the agency. They may be able to negotiate an offer in compromise, in which you pay a reduced lump sum to pay off a larger debt, or get you placed in currently noncollectible status (CNC), when there's a valid reason you're unable to pay even a nominal amount. This could apply to those facing hard times because of the pandemic or for other reasons. Winstead says that the larger amount you owe, the more likely it is that an experienced attorney who's "used to getting settlements" can assist you.
Winstead says a tax attorney can help clients navigate CNC status based on your specific situation. "We say, 'Look, IRS, they can't afford to pay anything; can you recognize that they are experiencing hardship and agree not to collect against them?"
Face your fears...
If you're not sure whether you can handle contacting the IRS on your own, Winstead notes that most tax attorneys offer a free consultation, usually in the 15-minute range, so you can speak with them and get a sense of whether you'd be a good fit as a client.
For those living in fear of the specter of the IRS, Tulino says their goal is to work with you, not against you. "The IRS understands that people owe. There's all kinds of different relief we can provide," he says. If you start receiving letters from the IRS and simply ignore them, eventually you could face liens or levies. Contacting the IRS directly or through a tax professional, ideally as soon as you know you can't pay, or else once you receive a notice from them, can help you avoid that outcome.
Winstead notes that it's common to feel anxiety when you're dealing with tax debt, especially if this is your first time facing the situation. "A lot of people have tax problems; you're not the only person," says Winstead. But ignoring the problem won't make it go away; arm yourself with information so you can either contact the IRS yourself or get assistance from a tax professional. Winstead advises doing background research at the IRS website "to see what procedurally you may have to deal with and what options may be available to you."
Winstead also stresses being proactive about your taxes. "Don't bury your head in the sand." If you start receiving letters from the IRS, read them. It may be tempting to ignore them, but that only means you'll be in the dark about what's happening with your tax situation. According to Winstead, some of the IRS notices will alert you to taxes you owe; if you ignore them for too long, you may receive notices saying they plan to levy your account. "They're constantly communicating with you; you have to know where the IRS is in the process. Once you know where they are, that tells you how much time you have to get your affairs in order," she says.
...but don't get scammed.
You should also beware of scams trying to trick you into giving out personal information, warns Porter, so be sure you're actually dealing with the IRS before giving out your information. "It's important to note that the IRS generally contacts taxpayers by mail first, and may send more than one notice by mail before initiating any telephone or in-person contact. If you know you owe money to the IRS, and they send you a notice, you should follow the instructions in the letter and work with them to arrange for a payment plan," says Porter.
If you do want to hire a CPA or tax attorney, Winstead recommends looking up their reviews on Google and the Better Business Bureau, and using a free consultation to get a feel for whether they seem like a firm you'll want to work with. Winstead notes that the fee structure is different with each firm.
You're not alone.
Tulino says the IRS wants to work with taxpayers "to help you come back into compliance," or take care of your obligations in a way that's best for you and the agency—in order to impose the least amount of burden, but at the same time, take what's owed.
Especially with the Covid-19 pandemic affecting so many people's financial circumstances, it's worth your while to be in touch with the IRS so you can work together to resolve your tax problems—even if you haven't filed in past years. It's never too late to get help.