5 Things to Do if You End Up With a Tax Liability

April 22, 2017 at 12:42 PM Leave a comment

Owing the IRS or your state department of revenue can be scary, particularly when you begin getting threatening letters. A tax liability doesn’t have to ruin your life. As long as you are honest with the IRS, make an effort to pay, and keep any agreements you make, they will be willing to work with you. Whether it’s a few hundred dollars or tens of thousands, here’s how to manage a tax liability.

Pay What You Can

It’s easy to become so overwhelmed with a large bill from the IRS that you ignore it and pay nothing. Don’t do this. Pay whatever you can now. That will be money that doesn’t cost you interest payments. It also shows a good faith effort to be cooperative. Make a payment now, and continue paying whatever you can until you work out an agreement for the long-term.

Get Sound Financial Advice

It’s rarely a good idea to make major financial decisions on your own. Particularly if you have a large tax liability, consult with a financial or budgetary advisor. Then work with an accountant or tax lawyer who can advise you of your liability and negotiate with the IRS on your behalf. If you filed your own taxes, it’s also a good idea to have someone look over the numbers. There may be credits or deductions you missed, and these could help reduce the total balance.

Ask for a Payment Plan

The IRS almost always is willing to issue a payment plan. If you owe less than $50,000, you’re eligible for such a plan even without submitting a financial disclosure statement. Most repayment plans last about five years, so the minimum monthly payment will depend on your total liability. Make your monthly payments each month, no matter what, and you’ll have no further problems form the IRS.

Consider an Offer in Compromise

Taxpayers who can’t afford their full tax liability, but who can make a large upfront payment, should consider making an offer in compromise (OIC). The IRS always prefers to get money now instead of later, and an OIC capitalizes on this. It can also save you money in interest and penalties. The key is to make a reasonable offer. If you owe $10,000, paying $500 is not reasonable, but paying $6,000 might be. Talk to your accountant or tax lawyer about reasonable offers clients in situations similar to your have made, then submit your offer. If it is approved, you can pay the compromise amount to wipe out your tax liability.

Borrow Money Intelligently

Borrowing money to repay your tax debt may be an intelligent decision. If you can get an interest-free or low-interest credit card or loan, borrowing to pay down your debt is a no-brainer—as long as you can quickly repay the loan.

What if you can’t get a low-interest loan, or you’re unable to quickly repay it? Borrowing may still be a good idea if you can’t get a payment plan, make an offer in compromise, or tolerate the stress of owing the IRS money. Sometimes financial decisions aren’t entirely matters of numbers, so if the stress is keeping you up all night, a loan might be worth the additional payments it will require if it gives you peace of mind.

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