The IRS may be the most frightening creditor a person can have, not excluding the Mafia. As a government agency, the IRS has considerable power to get its money out of you one way or another. In pursuit of its taxes, the agency can garnish your paycheck, seize your property, and wreck your credit. So if you owe more money on your federal taxes than you can afford to pay, you need to find a way to resolve the situation -- pronto.
Here are some ways to reduce your tax bill to a manageable size, or at least get more time to pay it.
Lower your tax bill pre-emptively
If the scary tax bill in question comes from a tax return you're currently filing, you may be able to reduce that bill with some last-minute tax planning. For example, there are numerous obscure deductions and credits strewn throughout the tax code that could end up saving you enough money to make your bill affordable. Your best bet in this situation is to hire a tax professional (a CPA or enrolled agent, not the teenager working at your local tax-preparation chain). Yes, you'll have to pay to have your taxes done, but the odds are good that such a professional will be able to squeeze at least enough extra tax breaks out of your return to pay for their fees and then some. Plus, if you still owe more than you can pay, these tax professionals can represent you before the IRS and help you negotiate some kind of deal.
One tax break that you don't need a pro's help to maximize is the IRA contribution deduction. While some tax breaks are limited to the tax year in question, you can take the deduction for IRA contributions you made right up to the filing date in the following year.
For example, if you're preparing your tax return for the 2017 tax year, you can make additional IRA deductions right up until April 17 and claim the deduction for them on your 2017 return. However, there are limits to this deduction: You can't exceed the annual contribution limit for IRAs, and if you have access to a 401(k) or other workplace retirement account, you may not be able to deduct your IRA contributions.
Image source: Getty Images.
Request an offer in compromise
The IRS offer in compromise program is a way for taxpayers who truly can't afford to pay their taxes to strike a deal with the agency. In some cases, you can reduce your bill to pennies on the dollar. However, an offer in compromise will only be accepted if you can prove that you don't have either the income or the savings to pay all your taxes. You can make an offer in compromise on either a new tax debt or a long-standing one.
If you decide to pursue an offer in compromise, head on over to the IRS website and download the necessary forms (Forms 656 and 433-A). Be prepared for a blizzard of paperwork, as you'll need to fill out some extremely lengthy forms and provide lots of documentary proof as you work your way through the process. The IRS forms will walk you through which grounds to choose for your offer and how much the agency is likely to accept as a minimum offer. You can also hire one of the aforementioned tax professionals to handle the offer in compromise process for you. If you choose this route, confirm that your pro has experience with offers in compromise work before you hire them.
Set up an installment plan
If all else fails, the IRS is usually happy to set you up with an installment agreement, rather than requiring you to pay the whole sum at once. The agency will charge you interest as you work on paying off the entire balance (for first quarter 2018, the IRS interest rate is 4%), and it may charge you penalties as well. For that reason, it makes sense to pay as much as you can up front and pay the remainder in installments.
Short-term payment plans of less than 120 days cost nothing to set up, and you can put in your request through the IRS website if your tax bill is less than $100,000. Long-term payment plans will cost you a one-time setup fee of $149 for online setup or $225 if applying over the phone or in person (though this fee is reduced to $31 for online filing and $107 for live filing if you agree to automatic withdrawals; low-income taxpayers may also qualify for reduced fees). You can apply online for a long-term payment plan if you owe $50,000 or less in federal taxes, interest, and penalties, and if you've filed all required tax returns for previous years.
A humongous tax bill is not good news for any taxpayer, but it's also no reason to despair. The one thing you don't want to do in this situation is ignore it; doing so will inevitably lead to IRS agents banging on your door and confiscating your money and your property. And once you start exploring your options, you might find you don't have to pay nearly as much as you feared.
