If you are unable to pay the full taxes at one go, it is best to apply for an installment agreement in Form 9465. This can be done online, if the tax dues are less than $25,000.
For higher tax dues you will have to fill up Collection Information Statement as well in Form 433F and may have to visit the tax office. You can also call the IRS and explain your problem to them who will then guide you in the matter.
Remember, however, to file all the back returns, if not filed, as that is a necessary precondition for granting installments.
Apart from the Collection Information Statement, the IRS may also require you to furnish copies of supporting documents. Based on the details provided of the assets and income, the IRS determines the quantum of monthly installment and the number of months for which the installments are to be paid.
This is an area of negotiation. The IRS may ask you to modify the proposals and even refuse to accept your proposal.
It needs to be remembered that the law allows only a ten year period to the IRS for collecting the dues. The time is to be measured from the date of assessment leading to the demand. However, the tax payer has the power to extend this time and if he does so, the IRS may be willing to allow installment payment beyond the ten year period.
It is in the interest of the tax payer, however, to pay the demand as early as possible. This is because interest continues to accumulate on the unpaid amount during the installment period.
Delayed payments of tax also invite penalty, though it may be possible to seek their abatement if the delay is for bonafide reasons. Considering the cumulative impact of interest and penalty, tax payers may be better off by borrowing money and paying taxes at the earliest.
The mode of payment of tax is another area of negotiation. The IRS prefers that taxes be paid by way of payroll deduction from the wages or by way of direct debit from your bank account.
This may also be in the interest of the tax payer as it makes for regular payment which enables the continuance of installment agreement. In case of default, the installment agreement may be canceled and the tax payer may be subjected to coercive recovery action such as wage garnishment and bank levy.
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