A lot of Americans are getting an unwelcome surprise when they file their taxes this year. Thanks to recent changes in the tax laws, they’re getting a smaller refund than they’re used to or — worse yet — they owe the Internal Revenue Service (IRS) a considerable amount of money. The Government Accountability Office (GAO) anticipates that over a fifth of Americans will owe money to the IRS this year.
Many people can’t afford to get hit with an unexpected tax bill. A recent survey by Bankrate found that 60 percent of people in this country don’t have enough savings to cover a $1,000 emergency.
So what are your options if you owe the IRS more than you can afford to pay? The IRS offers taxpayers three choices:
Payment plan: The IRS offers short-term and long-term payment plans. Be aware that if you enroll in one of these plans, you’ll still have to face penalties and accrue interest on your unpaid tax bill. There are also late fees if you don’t adhere to the payment plan.
Offer in compromise: This is where the IRS agrees to settle your debt for less than the amount you owe. When considering whether to agree to that, the IRS looks at a person’s income, expenses, ability to pay and asset equity. If you receive an offer in compromise (or even if you’re still being considered for one), the IRS may place a lien on your property. The IRS cautions taxpayers, “Explore all other payment options before submitting an offer in compromise.”
Temporary delay in collection: This option is only for those who can show that if they paid their tax debt, they wouldn’t be able to afford the cost of basic necessities like rent and food. To apply for a delay, taxpayers must submit a Collection Information Statement with their income, expense and asset information. As with the other options, taxpayers will still be assessed a penalty and required to pay interest until their full tax bill is paid.
If your 2018 tax bill has pushed you further into debt and you don’t see a way out, it may be wise to consider bankruptcy. While tax debt can only be considered for possible discharge in bankruptcy if it’s a minimum of three years old, bankruptcy can help you deal with and discharge other types of debt so that you can get a fresh start.