You’ve collected your receipts, finished your forms early worked with both a tax attorney and accountant. You’ve done everything right, but at the end of the day, you still owe the IRS a HUGE chunk of cash. Your hopes of using the refund for a nice trip to Tahiti have been dashed and you have to break out the check book and make a huge payment to the IRS. Discovering that you owe money to the IRS can be a difficult time. Owing a LOT more than expected is bad but the IRS can be easy to work with as long as you follow these steps.
1. Why do you owe so much more than expected?
Tax surprises are never fun, but if you owe much more than you expected, something might be wrong. Maybe your accountant added an extra zero or missed a decimal point. Read and then re-read your tax forms to ensure that they are error free. Its possible that you or your accountant missed a deduction or credit, or missed a checkbox or two that is causing the error.
Something else to try is comparing tax returns from previous years. What has changed? Which numbers seem right and which seem off? Before you get worked up about your IRS debt, check to make sure that you really do owe the money.
2. Make sure that the IRS truly is correct
Sometimes after you submit your tax forms, the IRS sends you a demand letter containing an amount that they think you owe. Don’t panic. They make mistakes too so contact them for clarification on the amount. Don’t automatically assume the IRS is correct. If everything still seems confusing, contact a tax attorney like D. Mathew Blackburn. We specialize in negotiating with the IRS and can help you in case that big number on the bottom of that letter turns out to actually be true.
3. Minimize penalties and interest
Adding insult to injury, the IRS usually hits you with penalties and interest on top of the original amount owed. Work with the IRS to minimize these penalties so you don’t end up owing a mountain of additional cash. Remember that if you underpaid your taxes this year, but you owed considerably less last year, you generally don’t pay a penalty for underpayment of tax if you paid or had withheld at least as much as you owed last year, and you pay by the due date this year.
The IRS often reduces or removes penalties and interest on the penalties if a taxpayer writes a letter explaining the situation. For example, if you had an unusual tax event, you made an honest mistake, or you or your spouse had a serious illness, the IRS may waive the penalties. The key is to ask for an “abatement” in your letter. A human does read these letters and can make a decision pretty quickly and easily. If it saves you some serious money, writing the letter is worth your time.
Lastly, if you owe tax that may be subject to penalties and interest, don’t wait until April 15 to file your return. Send in an estimated tax payment as soon as you know the amount owed, or file early and pay as much tax as you can at that time. No only will this reduce penalties and interest, it gives you leverage when negotiating discounts.
4. Ask for an installment plan
If you can’t pay the tax by the time it is due, don’t avoid the bill. Ask to pay in installments. You will end up paying off your tax debt like a credit card – a little bit every month, with a little interest added, until the bill is paid off. The good news is that if you owe the IRS less than $25,000, they must allow you to make payments. This can help make the debt a little easier to handle.
As tax attorneys, we often negotiate a compromise between the IRS and taxpayer. We’ve negotiated steep reductions in taxes owed for a majority of our clients and can help you negotiate with the IRS when the debt is overwhelming. Don’t panic! We can help. The most important thing is to be honest with the IRS and you will be surprised how willing they are to help you pay off your tax bill.
If you have any questions about the upcoming tax season or need help negotiating a deal with the IRS reach out and let us help you.