It’s quite easy to get into an IRS or state monthly payment plan. But what if you can’t make the payments or you owe new taxes the next year?
If You Owe Income Taxes, Consider Entering into an Installment Agreement
If you owe income taxes that you can’t pay any other way, look into paying it off through a monthly installment agreement entered into directly with the IRS or state tax agency. This option is particularly sensible if you don’t have other serious debt problems, can reliably make the required monthly payments, and do not expect to owe additional taxes when you prepare your next year of income taxes.
Look Into the Benefits of Bankruptcy If You Do Have Other Serious Debt Problems
Most of the time, people who have fallen behind on their income taxes have done so because they have other debts which have gotten in the way of paying the taxes. If you have tax debts you likely have other significant debts.
If so, check out what either Chapter 7 “straight bankruptcy” or Chapter 13 “adjustment of debts” can do for all your debts, including the taxes. You may decide that neither of these two is appropriate for you. But you can’t make an informed choice about it without understanding how your debts, and your tax debt in particular, would be treated under these two options.
Especially Consider Bankruptcy If All or Most of Your Tax Debt Qualifies for “Discharge”
Earlier in this series of blog posts, we explained what conditions must be met before a tax could be “discharged”—forever legally written off in bankruptcy. Simply put, you ought to know whether all or most of the taxes you owe could be discharged before you enter into an agreement with the IRS/state to pay the taxes in monthly installments.
Avoid a Tax Installment Agreement You Can’t Consistently Pay
It may sound obvious that you should not enter into an agreement that you can’t keep, and that especially you shouldn’t with the IRS or state.
But you might feel pressured to do so. You may feel that you have no choice. If you find yourself feeling pressured, that’s likely a sign that you should really question whether an installment agreement is right for you.
Even if you don’t feel pressured because you genuinely believe that you will be able to make the required string of payments, be sure you know the consequences if your circumstances change and you can’t pay after all.
And again, look into how bankruptcy would handle your particular tax debts, so you can at least compare that to entering into an installment plan.
Avoid a Tax Installment Agreement If You’ll Owe Again Next Year
One way to violate your tax installment agreement is to owe taxes when filing tax returns the following tax year. So unless you are confident that you can pay off your installment agreement before the next tax year’s tax returns are due, be extremely cautious about entering into a tax agreement that is in effect set up for failure.
If you still go ahead with the installment agreement, you may think you’re buying time but you could well be instead setting a trap for yourself. Instead of buying time you may be wasting valuable time, delaying the time when you start squarely facing and addressing your overall problems.