After De’Lante A. Rawls, 34, left his job as an insurance agent in 2002 to open his own agency, he was hit with a $7,000 tax bill because he hadn’t withheld taxes on his self-employment earnings. When he couldn’t pay the entire bill immediately, he consulted with a certified public accountant who advised him to file his return on time and arrange an installment plan with the Internal Revenue Service.
“They put me on a five-year plan to pay it off,”says Rawls, now founder and managing principal of National Insurance Consulting Group in Washington, D.C. The monthly payments of $150 covered the balance plus interest and late penalties. But Rawls, determined to accelerate the payments, applied every extra cent he could and paid off the balance in 18 months.
As Rawls discovered, an unexpectedly large tax bill can pose a daunting challenge, but it doesn’t have to be financially devastating. “Most taxpayers are afraid of the IRS,” says Anthony G. King, a partner with Baltimore-based CPA firm King, King & Associates PA and a board member of the National Association of Black Accountants. “But the IRS is flexible.” This year in particular, the IRS has announced that it will assist taxpayers in light of the ailing economy (www.irs.gov/pub/irs-news/ir-09-002.pdf), so if you find yourself with a tax bill you can’t pay, consider the following:
Be up front. “Come clean, because the IRS is going to get its money eventually,” says Patrick Fleenor, chief economist at the Tax Foundation, a nonpartisan tax research group based in Washington, D.C. Unlike other types of creditors such as mortgage lenders, the IRS can garnish your wages, Fleenor points out.
File on time. Even if you don’t have the money to pay, file your taxes on time, says Cindy Hockenberry, tax research coordinator at the National Association of Tax Professionals, an industry trade group based in Appleton, Wisconsin. “There’s a failure-to-file penalty and a failure-to-pay penalty,” she says. The combined penalty is 5% (4.5% for filing late, and 0.5% for paying late) of the amount owed for each month or part of the month that the return is late, up to 25%.
Ask for an installment agreement. An installment agreement lets you pay off the debt over a period of time. If you owe less than $25,000, the process of setting up an installment agreement involves paying a fee of up to $105 and filing IRS Form 9465. “That form basically says, ‘I owe you $5,000 on my tax return, I’m sending you $500 right now, and then on a certain day of the month I will send you another $300 a month until it’s paid,’” says King. For debts of $25,000 or more, you can still request an installment agreement, but you may need to submit information about your finances so the IRS can assess your situation. In addition to late penalties, you’ll pay interest—the federal short-term rate plus 3% (at press time, 5%), a rate that can change every three months.
Seek an Offer in Compromise. If your tax bill exceeds what you can afford to pay in the near future, the IRS may agree to an OIC, which basically means the IRS will accept less than the due amount. However, a taxpayer cannot have assets, such as equity or retirement accounts; nor any way of amassing enough income to cover the bill. Also, be aware that an OIC can cost thousands in CPA fees since negotiating one can take more than a year. You must also submit documents detailing your financial picture, King says.
Whatever agreement you make with the IRS, make sure you keep it or the deal will be null and void. If that happens, the IRS can demand the money immediately.
This article originally appeared in the April 2009 issue of Black Enterprise magazine.