Step-by-step guideline on what to do if you cannot afford to pay your taxes
The IRS had extended the tax return filing and payment deadline until 15th July 2020 for the Americans to alleviate the financial crisis faced by millions of Americans due to the pandemic COVID-19. However, the pandemic has led to the unemployment of millions and millions of Americans. So, even with the extension in the return filing and tax payment deadlines, it is quite difficult for some Americans to pay their taxes on time.
The IRS has a simple reminder for the taxpayers who cannot pay their entire amount of federal taxes which they owe. They should file their tax returns on time and pay as much as possible. By this, the interest and penalties of taxpayers would reduce and there would not be much accumulation of interest to pay back.
If a taxpayer plans to pay his taxes as much as he can afford, then the IRS has some convenient methods to do this i.e. by IRS Direct Pay Method, Electronic Federal Tax Payment System (EFTPS), Electronic Funds Withdrawal, Debit or Credit card, or by Check/Money Order, etc.
However, for those taxpayers who feel payment of taxes are unaffordable at the moment; they can follow a detailed plan.
Step1 – File by the new 15th July deadline even if it feels difficult to afford the payment on time
As said earlier, due to the pandemic COVID-19 the deadline to pay the Federal taxes has been pushed to 15th July 2020. However, with this extra time, taxpayers should not wait much more to file their taxes. Taxpayers must consult tax professionals for filling the forms. By this, the credits and deductions to lower the bill can be found out easily.
Many taxpayers might consider the option of the deadline extension. However, the extension would provide more time for filing the tax returns but not for
paying the taxes. Even if there is an extension, the tax payment must be done on time. So, an extension should only be filed by the taxpayers if due to some reason the taxpayer is not able to file the tax returns on time.
Step2 – Pay as much as possible by the tax deadline
This is also recommended by the IRS that the taxpayers should wait till the deadline, try to arrange for the tax amount, and pay off as much as possible. Some taxpayers even prefer discarding some of their unwanted materials in exchange for cash which can be utilized in payment of their taxes which are due.
Taxpayers can contact the IRS on the toll-free number to discuss alternate payment options. IRS might help the defaulter taxpayers with other payment options like a short-term extension to pay the taxes, an
agreement for installment, an offer in compromise, or by temporary delay in the collection by reporting that the taxpayer’s account is currently not collectible until the taxpayers can afford to make the payment.
Step3 – Keep paying the taxes you owe even after filing
Even after Tax Day, taxpayers would have a period of around 1 month or 2 months before the IRS would contact them about the rest of the tax payment. During this available time of 1month or 2 months, taxpayers should try to pay out as much as possible to reduce the balance left out.
In case the taxpayers are not able to make their complete payment by this time, the IRS would suggest options for making the rest of the payments in monthly installments.
Step4 – Rectify the problem
You should approach a tax professional and try to work with him or his team to ensure that you are not stuck with the problem of unaffordability related to tax payments. This can be feasible either by setting aside profits from a side business or by the adjustment of withholdings from your paychecks.
Your issues can be best identified and rectified by the tax professionals so that these issues are avoided in the future.
Hence, you can follow these steps and try to pay off as much tax as you can. Avoiding the aggregation of penalties is important to avoid any further financial and economic hardships.
How to start a business as an NRI in the US if you owe taxes?
As an NRI, if you are planning to launch your own business but you owe taxes and are not sure about how to proceed then you might find yourself in a confusing situation. In this scenario, it depends if your situation would be affecting your ability to start or launch a business. Your tax debt may not prevent you from starting a business; however, it can affect your goodwill and even your ability in obtaining loans for your business.
Possibilities of business incorporation
Even if you owe taxes to the IRS, you would still be able to incorporate your own business. Generally, corporations and the LLC business structures would allow you to separate and also protect your assets. If you are planning to launch your own business, you must have a very clear distinction between the business and yourself as an individual. By the process of incorporating or forming an LLC, it is implied that you are eligible to run your business without any fear of your personal assets being seized due to your business debts.
If you consider the scenario from a tax standpoint, it is much easier to pay off or rather manage taxes if your expenses for business re kept separated from your personal expenses. Corporations and LLCs can deduct eligible expenses like salaries and supplies; however, it would become more complicated if your personal expenses and business expenses are mixed up. You must work very closely with a tax advisor or tax professional to help you in the proper set up of your company.
Financing of your business when you owe taxes
When you apply for the financing of your business, your business loan application could be affected by your personal credit. Usually, financers would evaluate in detail your personal credit and financial history before granting you a business loan.
If you have a high amount of tax debt or you have not paid your taxes then your credit score might decrease steeply.
If there is a tax lien against you then it would remain on your credit report for a long time even when you have paid the tax.
4. If you think your tax debt can create an issue for the financing options available for your business, you can consider the below-mentioned financing options.
Short term loans – You can obtain a short term loan if your business has a sustainable cash flow. This kind of loan places greater emphasis on the revenue of the company rather than on your credit score.
Term loans– For term loans, you would need good personal credit. Moreover, these loans would give you a lump sum money which you would have to repay with a fixed interest rate.
Accounts Receivable Financing – If you are waiting on your unpaid invoices to pay your business expenses, this type of loan is the best option for you.
SBA Loans – SBA loans are highly sought as their lower interest rates are added up with longer repayment terms.
Resolve your unpaid taxes
If you owe back taxes to the IRS, then the IRS has the authority to collect the taxes by seizing your property through a tax levy. By a tax levy, the IRS is allowed to seize your bank account balances, your wages, real estate, automobiles, retirement accounts, and any other assets. However, you can still work and earn.
You will have to discuss your unpaid taxes with the IRS. If you have negotiated with the IRS and decided that you would be paying your debts using an installment agreement, then you would be able to start your own business. However, you must keep in mind that if you try to hide your assets from the IRS’s levy by using your business as a front then it is illegal.
Some other tax considerations
From the perspective of business structures, there are four types of business structures and each one would be having a different influence on business taxes.
a.Sole proprietorship – If you are setting up your business as a sole proprietorship, your business would not be separate from you as an individual from a legal perspective. By this, your business would not have to pay business income tax as you would have to report your self-employment income only.
b.LLC – LLC means Limited Liability Company and by this, your company would get its own identity and status different from your personal identity. You can receive more protection and financial benefits. Your LLC would not have to pay business income tax and you would only pay personal income tax.
c.S-Corp – It is also a business structure that is not liable for business income taxes and all the business earnings would pass through the owner.
d.C-Corporation – C-Corporations might be a publicly-traded company or a small company, this business structure requires you to pay business income taxes.
Hence, even if you owe taxes to the IRS it does not mean that you will not be able to set up a business of your own. You should not ignore your tax obligations, connect with experienced tax professionals for tax resolution services, and get ready to pursue your dreams of starting your own business.
New to the US? Here are the taxes paying options that you should be aware of.
In the US, taxes must be paid on time failing which you might have to pay heavy penalties. You must always try to make the tax payment in full and on time. There are various methods by which the tax payment can be done.
a.Electronic mode of payment
You can pay your tax directly from your bank account through the electronic mode of payment. This electronic mode of payment can include making your payment through your phone, any other mobile device or by the use of cards.
When you are making your tax payment with the help of either your debit card or credit card, you can use any of the three processors which co-ordinate with the IRS i.e. World Pay US, Link2GocCorporation or Official payments. The service fee which is charged by these processors is tax-deductible. You can make an electronic payment using the IRS2Go app as well. By visiting the Payment page, the payment can be done instantly and even payment can be scheduled in advance. By using a phone or other mobile device you can make the payment for the Electronic Federal Tax Payment System. After your payment, you can receive instant confirmation about the payment.
b.IRS Direct Pay
This is a secure service that you can use for making your tax payment for Form 1040 and estimated taxes. This payment is done directly from your bank account without any charges being levied on you. It is easier for you to check the status of your payment and even receive notifications about your payment. It is also possible to cancel your payment or make changes in the payment for 2 business days before your scheduled payment date arrives.
You can also make your tax payment by cash at participating retail outlets like 7-Eleven. There is a service tax charged for this and it takes 5-7 business days for processing of the payment.
d.By cheque, money order or cashier’s cheque
You can enclose your cheque, money order or your cashier’s cheque along with a copy of your tax return. You have made this payable to the United States Treasury and also provide name, address, TIN, Tax year, Notice number, etc.
In case you are not able to make the full tax payment immediately, you can avail the provision of additional time i.e. up to 120 days and make the payment in full. There are no additional charges levied for this but there is an interest that gets accumulated till the entire amount is paid off. This facility can be availed by the help of the Online Payment Agreement (OPA) or by using toll-free numbers.
e.Pay tax in installments
In case, you are not able to make your full tax payment by the due date or within 120 days then you can opt for a Monthly Installment Plan for making your tax payment. You can request making tax payment in installments by using the OPA application, Installment Agreement Request or Form 9465. You can make your monthly installment payments by using several payment options like
Payment by debit card or credit card
Payment by cheque or money order
Payment by the Electronic Federal Tax Payment System (EFTPS)
Payment through cash with the help of a retail partner
Payment is done by direct debit from the bank account
Payment is done by deduction from payroll
When you are selecting the tax payment to be done by direct debit from a bank account or deduction from payroll, the process is automated and there would be no chances of missing the default payment date.
Usually, if you are selecting a payment plan then IRS would charge additional fees from you for this purpose but if you belong to the low-income taxpayer group then this fee would be reduced or waived based on specific conditions.
Hence, with the various forms of convenient tax-paying options available in the US; filing of tax returns would not be difficult even if you are new to the US.