So you’ve filed your taxes, and you’ve discovered that you owe money. This can happen for a number of reasons, the most common reason being that as an Independent Contractor you simply did not have enough tax withheld during the tax year in question. Whatever the case may be, now you find yourself owing taxes to the federal government, and it can be a daunting task figuring out how to pay the money you owe if the amount is greater than you expected.
Thankfully, the IRS has payment options you can utilize to fill your financial obligation. Depending on your current financial situation, you can either pay the debt in full, set up a payment plan, or even work out a compromise with the IRS.
For those who wish to set up a payment plan:
Payment plans are offered for both personal tax debt and business debt. If you are a sole proprietor or Independent Contractor, you must set up a payment plan as an individual. For individuals, you can either set up a short-term payment plan which is paid off in 120 days or less, or a long term payment plan, which sets up payments beyond 120 days.
You may qualify to apply online for the short term payment plan if you have less than $100,000 in combined tax, penalties and interest. For the long term payment plan, you must have less than $50,000 in combined liability. These amounts are merely for the online payment plan application, and not the only options available for individuals, sole proprietors or independent contractors.
For instance, if you find you owe $8,000 in tax liability but a short-term solution is more than you can afford, you can fill out Form 9465, which is the Installment Agreement Request. Form 9465 is flexible in that there is no minimum or maximum threshold to request a payment plan, and, if approved, you may be given as many as 72 months to pay off your debt.
You may also be asked to fill out Form 433-F, which is the Collection Information Statement, which asks more detailed information about your income, assets and expenses.
For businesses, to apply online for a payment plan, you should have less than $25,000 in combined tax liability (interest, tax and penalties). The online application is only for a long term payment plan of 120 days or more. To apply as a business, you must have your Employer Identification Number, the month and year the business was established, the address from your most recent tax return, and your Caller ID from notice.
There are other options available as well, including requesting an Offer in Compromise. The IRS will allow you to settle your debt for less than the amount you owe if they determine you qualify based on your ability to pay, your income, your expenses and your asset equity. For this you will fill out Form 433-A for an individual, or 433-B for a business entity, as well as the related 656(s) for businesses. Your application will be considered, and you have a better chance of being approved if the amount offered represents the ‘most we can expect to collect within a reasonable amount of time’. The statute of limitations for collections by the IRS is 10 years. If you owe only for the current year, it is unlikely that an offer in compromise will be approved because they have ten years to attempt to recover the tax and think your situation may change. However, if you owe a significant amount for a number of tax years, an offer in compromise is something you should explore.
Finally you may request that the IRS delay collection of the debt until your financial situation improves, which may be useful if you are a seasonal sole proprietor or Independent Contractor, or in any instance where you are currently unable to make any payments at all. This is called being placed in "Currently Not Collectible" status. The delay only applies to collection activities by the IRS. Any applicable interests and penalties will continue to accrue even though you are not making payments, and the IRS can file a lien against your assets until you pay your debt in full. You must contact the IRS directly to request this option.
Each option is subject to approval by the IRS, and a denial can be appealed. It is best to evaluate your financial situation and bear in mind that interest and penalties may continue to be added to your debt the longer the debt exists. There are also fees associated with most of the payment options, although these may be waived if you meet the Low Income Certification guidelines. If you situation is complex, it's always best to speak with a tax professional to determine which option makes the most sense for you.