Most people expect to receive a refund when filing their annual tax returns. Particularly when someone is an employee, they expect their employer to make tax payments on their behalf. They can then reconcile their tax contributions with an income tax return. The Internal Revenue Service (IRS) may issue a refund if an employer withheld and contributed more than a worker actually owed.
However, not everyone qualifies for a tax refund. Some people may end up owing taxes when they file their tax returns. Small business owners and self-employed professionals often owe taxes when they file their annual returns. Some people wait till the last minute to file their returns and end up shocked by what they owe.
What happens if someone can’t pay their income taxes in a single lump-sum payment?
The IRS may accept payment arrangements
When someone owes back taxes and cannot pay what they owe by the annual filing date of April 15th, penalties and interest may quickly start accruing. The IRS calculates tax interest on a daily basis and imposes numerous expensive penalties on those who have outstanding tax balances due. Those excess costs can quickly start adding up and may push someone further into tax debt.
Thankfully, it is possible to make payment arrangements with the IRS. Anyone who cannot pay the full amount of taxes due at once could potentially propose an offer in compromise. The IRS accepts both lump-sum offers to settle tax debts and payment plans. Making regular payments to the IRS can potentially help someone avoid worsening penalties and reduce the potential of prosecution.
A successful offer in compromise can help someone rebalance their household budget while taking control of their tax debts. Although interest may continue to accrue, efforts to pay down income tax debts can protect someone from prosecution and rapidly snowballing financial penalties.
Proposing a plan is overwhelming to the average taxpayer
It can be difficult to propose an offering compromise successfully, in part because the IRS usually expects people to commit a sizable portion of their monthly disposable income to their tax obligations. People may need help reviewing an income tax controversy and putting together an offering compromise that the IRS might actually accept.
Exploring ways to gain control over unpaid income tax obligations, including making an offer in compromise, may help people avoid the worst-case scenario wherein they are at risk of prosecution and losing control over their finances. Taxpayers who are assertive about handling their responsibilities can limit the penalties imposed for an underpayment of their income taxes.
