What Should You Do If You Owe Taxes?

Tax season has arrived and many Americans are still struggling financially. The recent economic crisis is still having a dire impact on the ability for families to manage their day to day finances. It is no surprise that an increasing number of people are having trouble meeting their income tax obligations. So what can you do if you find yourself unable to pay your income taxes?

Do not panic or procrastinate. IRS tax notices and balances due on recently filed tax returns can bring out a lot of negative emotions. Once you recognize that you owe taxes to the IRS take action immediately. Just because you cannot afford to pay the taxes due immediately does not mean there are no options. Many people make a tax problem worse by procrastinating or avoiding it altogether.

Create a financial plan. The creation of a financial plan is the single most important step to take when you owe taxes to the IRS. Why? A financial plan provides the guidance needed to help you address the tax situation and other important financial life goals. Unfortunately, most people tend to avoid this step altogether. When working with clients experiencing tax debt problems I refer to their financial plan as a tax resolution plan.

In order to resolve tax problems the most cost-effective way possible you need a tax resolution plan. The ultimate goal should be to get out of debt quickly so you can focus on other more important aspects of your financial life. Goals such as saving for your child’s education, retirement, paying off debt, buying a house, etc. are difficult to achieve if you owe the IRS. A financial plan will also help you with future income tax planning. Some areas of focus could include maximizing all potential tax deductions, reducing future taxes, tax efficient investing, and planning ahead for future tax related events.

File your taxes. Go ahead and file a tax return even if you cannot pay the taxes owed in full. This will eliminate the failure to file or late filing penalties. In many cases the IRS will not work with you until you have filed all past due tax returns.

Stay current with future tax obligations. While you are working to resolve your tax debt problems you must stay current with your tax obligations. For self-employed individuals this requires you to continue (or begin) making estimated tax payments. If you are a wage earner you need to make sure that you are having sufficient taxes withheld from your pay.

Establish a plan. By following the financial planning process you should obtain a good understanding of where you stand financially. Complete a net worth analysis that explores everything you own and everything you owe to others. You will also need to complete a cash flow analysis that looks at your income and expenses. These two factors are critical when exploring all of your available options to resolve the tax debt.

Explore all available tax resolution options. If a taxpayer cannot pay taxes owed in full, the most common tax resolution alternative is to establish a payment plan or Installment Agreement. Other alternatives include Partial Payment Installment Agreements, Currently Not Collectible Status, bankruptcy, or requesting an Offer in Compromise. If you are considering an option other than setting up a payment plan you should consult an Enrolled Agent, CPA, or tax attorney.

Seek professional help as needed (with caution). Dealing with the IRS to resolve tax problems can be an emotionally exhausting experience.  Sometimes it is necessary to use a qualified tax professional to help address tax debt issues with an effective and timely response.  Unfortunately, the tax resolution industry is unregulated and many companies do not operate in their clients’ best interest.  CPAs, Enrolled Agents, and Tax Attorneys are the only professionals authorized to represent their clients before the IRS.  If you are seeking assistance with a tax problem, be sure to ask as many questions as possible regarding the tax professional’s qualifications, experience, fees, and client expectations.  Run quickly from companies that promise “pennies on the dollar” settlements or guaranteed acceptances of an Offer in Compromise.  Try to find a tax professional that values the financial planning process and will help you focus on life beyond the current tax debt situation.
Follow the plan and take action. Tax debt resolution requires discipline and planning. If you follow basic elements of the financial planning process you will be able to get out of debt sooner and move on with your life. Tax problems are stressful. However, effective solutions do exist for those that take action and follow a tax and financial plan.

About the author

Scott M. Spann, CFP®, EA

Scott Spann CFP®, EA is a Fee Only financial life planner and the founder of LifeSpan Financial Planning, LLC located in Charleston, South Carolina. Scott has been providing financial planning advice for a diverse group of clients since 2000. He is a Fee-Only financial life planner practitioner with a strong orientation in areas of tax planning and financial life planning. Scott also specializes in investment planning, retirement planning, college planning, tax planning and incorporating life planning into the financial planning process. Scott is committed to the Fee-Only model of financial planning.

Scott is originally from Greenville, South Carolina and has called the Lowcountry his home since graduating from the College of Charleston in 1997. He began his financial planning career in 2000 after completing graduate studies at The Citadel (MA, 1999) in the field of psychology. This academic background helped shape his vision to help his clients make the smartest decisions possible with their money in a client-centered relationship. Scott completed his advanced financial planning studies at the College for Financial Planning.

Scott is a member of the Nation Association of Personal Financial Advisors (NAPFA), the Financial Planning Association (FPA), and the National Association of Enrolled Agents (NAEA). In addition to promoting Fee Only financial planning, Scott also devotes a significant amount of time promoting financial literacy and recently volunteered with Your Money Bus. He is a frequent guest on the Money Matters Radio Show on 94.3 WSC FM in Charleston, South Carolina where he provides financial planning advice to listeners. Scott also provides free financial counseling to military service members as part of the Department of Defense's Financial Readiness Program.

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