Options for Struggling Taxpayers

Yesterday, Chicago Real Estate Forum discussed about taxes, and the importance of double-checking your work before filing. But what if you owe money and can’t afford to pay?
There are options for taxpayers, but ignoring them is not one of them. You could lose your home.
“If you can’t pay what you owe all at once, you should still file your tax return and make payment arrangements with the IRS,” said CCH Principal Federal Tax Analyst Mark Luscombe, JD, LLM, CPA. “If you don’t file because you can’t pay, you’re immediately facing a failure-to-file penalty as well as interest, additional costs and potentially a tax lien or levy down the road.”
According to officials at Riverwoods-based CCH, a Wolters Kluwer business, the IRS issued new rules last year to help taxpayers who can’t afford to pay their taxes on time, including expanding the time frame for when the IRS files a tax lien and expanding the options for installment payments from struggling taxpayers.
CCH offers these tips and suggestions:
*Get a Fresh Start: To take advantage of the IRS Fresh Start initiative, taxpayers must have been unemployed at least 30 consecutive days during 2011 or self-employed individuals who experienced a reduction in business income in 2011 of at least 25 percent due to the economy. Qualified taxpayers should fill out a new Form 1127A to request the 2011 penalty relief.
*Get an Extension: If you can’t pay the entire tax bill by April 17 but can within 120 days, ask the IRS for a short-term administrative extension. If you need more time than that, you might have to look into more drastic measures to secure the funds, including a home equity loan, a bank loan or a credit card charge.
*Get some Installments: The IRS is required to accept installment payments for up to three years if a taxpayer has a good filing and payment record over the past five years and the amount owed is not more than $10,000.
*Get a deal: Sometimes the IRS might settle for less than the full amount due. While this usually happens when a taxpayer can prove that the full tax debt will never be raised or there is a dispute over how much is owed, under a new rule, any taxpayer with an income of up to $100,000 and a tax debt under $50,000 can now request an offer in compromise from the IRS.
Just so you know, the penalties for ignoring tax deadlines include:
*The taxpayer faces a penalty of 5 percent of the tax due for every month missed, with a cap of 25 percent.
*The IRS can file a substitute tax return for the taxpayer based on information it has from other sources.
*The IRS can start a collection process that includes a tax levy or lien against the taxpayer’s home, bank account or wages. Tax liens can impact credit ratings and make it difficult to buy and sell property and even get a job.
Check out this video, “Options When You Can’t Pay Your Taxes with Mark Luscombe” of CCH: