What should you do if you file your tax return and then realize that you now have a large liability that can’t pay? First, don’t panic as there are several options for you:
Installment Agreement: An installment agreement can be a good option for you, which can sometimes be requested when you file your tax return. Interest and penalties will still accrue, but now you do not have to worry about levies. You may also request an extension of time to pay for several months if you expect to be able to pay off your balance quickly.
Offer in Compromise: Pennies on the dollar! We’ve all heard this advertisement from tax resolution companies. There is some truth to this, but it is greatly overstated. The way it works is that the IRS will accept an amount that is less than the amount of your tax liability. However, a majority of the offers are not accepted by the IRS.
Currently Not Collectible: This option allows you to postpone making any payments towards your tax balance and essentially places all collection activities on hold. However, the IRS may reassess your situation in the future to determine your ability to pay. Penalties and interest will still accrue.
No matter which payment arrangement you make, the caveat is that going forward you must always file your returns timely and full pay your balances. If not, then any arrangement that you have in place can default. Additionally, you generally need to submit financial information to the IRS for them to determine eligibility of an arrangement.
Prevention: How can this be prevented going forward? The first way is to make sure that you are properly planning how to minimize your tax liabilities before the year is over with proactive tax planning. The second way is to project your tax liabilities during the fall to estimate what your tax liability will be, which will make you aware of how much you will owe and give more time to figure out a good solution.