In the past year, the IRS has helped more than 2.5 million taxpayers with new tax relief requests, from establishing installment agreements to accepting Offer in Compromise (OIC) settlements. Tax relief programs can save taxpayers from having to pay additional penalties and interest, settle a tax debt for a fraction of what is owed when there is a financial hardship, and stop liens and levies.
Do I Have to Request Tax Relief Before the April Tax Deadline or October Extension Deadline If I Owe Back Taxes?
No, the IRS allows taxpayers to request an installment agreement or submit an Offer in Compromise at any time. Applying for tax relief is not tied to a specific tax return deadline or due date for estimated payments.
However, the IRS will add penalties and interest to your tax debt until it is paid in full. So, the sooner you establish a payment plan with the IRS to resolve back taxes the better.
Keep in mind that when you can ask for an extension to file the IRS will not give you a payment extension.
If you owe $10,000 on April 15th and ask for an extension to file your return on October 15th, the IRS will add penalties and interest to your original $10,000 balance for each month you do not pay after the April deadline passes.
Can I Apply for an Installment Agreement or Offer in Compromise If I Haven’t Filed My Tax Return(s)?
No, to apply for tax relief, including an installment agreement or Offer in Compromise, you must have filed all tax returns. This means if you have not filed taxes in three years, you will have to file all three years before you ask the IRS for tax relief.
For an OIC, you must also make your estimated tax payments and, if you own a business, make your federal tax deposits. Once your installment agreement is established or Offer in Compromise is accepted, you must file and pay all taxes on time.
Does a Substitute Return Change What Tax Debt Relief I Can Qualify For?
A substitute return (SFR) may increase how much you owe the IRS but will not always change what tax relief you can get. When the IRS files an SFR on behalf of taxpayers who do not file a return, they will not include credits, deductions, or exemptions they may be entitled to.
This can result in a higher tax liability. Not filing a return yourself does give the IRS more time to assess your tax debt and you cannot request tax relief for first-time penalty abatement.
Depending on your financial situation, having an SFR may affect tax relief payment plan terms or OIC offer amount.
What Happens If I Can’t Pay Tax Debt and Wait to Ask the IRS for Relief?
If you cannot pay your taxes by the April deadline or make payment arrangements, the IRS will charge a 0.5% Failure to Pay (FTP) penalty every month until you pay. The FTP penalty caps at 25% of your tax debt.
For example, If you owe the IRS $20,000 and do not pay, they can add up to $5,000 to your tax debt for FTP. In addition, you have to pay 8% interest on both the original amount and penalties.
IRS interest rates can change every few months, so the longer you wait to pay, the more you may owe. Since 2021, rates have more than doubled from 3% to 8% for unpaid taxes.
Waiting too long to establish an installment agreement, submit an OIC, or request Currently Not Collectible status when you have a tax debt could force the IRS to pursue more severe collection actions.
They can garnish your wages, place a lien on or seize your property, or levy your bank account(s) and other liquid assets (retirement, Social Security, etc.) The IRS filed tax liens or requested levies for almost half a million taxpayers in the last year.
Does the IRS Have a Deadline to Request Penalty or Interest Relief Separate from Payment Plans?
The IRS has no specific deadline for requesting relief for penalties and interest.
However, just like with installment agreements and OICs, it is best to work with them as soon as possible to minimize your tax debt and stop them from filing a lien or starting a levy.
First Time Abate Penalty Relief
You can request a First Time Abate (FTA) penalty waiver if you did not file, pay, or deposit taxes on time, and you have not had any penalties for the past three tax years.
Note that the penalty will only be removed up to your FTA request date. So, if it takes you longer than that to pay off your tax debt, you will have to submit a second FTA request for the remainder.
Reasonable Cause Penalty Relief
If you cannot file a return or pay taxes due to a natural disaster, hospitalization, or other circumstance beyond your control, you may qualify for Reasonable Cause Penalty Relief.
You will not be able to request Reasonable Cause for missing estimated tax payments.
Interest Relief
Interest relief is given only if the IRS committed an error or was responsible for a delay in processing that caused interest on a tax debt to accrue. They will not waive interest charges for any other reason.
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