On March 25, 2020, the IRS announced a new People First Initiative to help taxpayers who have difficulty paying their tax bills. The IRS suspended installment agreements and offer-in-compromise (OIC) payments until July 15, 2020.
Suspended Payments Now Due
If you didn't make payments or skipped payments between March 25, 2020, and July 15, 2020, you must now restart those payments. The IRS says taxpayers must start making payments again to avoid penalties and possible default.
See this IRS notice for more details on how to restart your payments for installment agreements, offers in compromise, and private debt collection.
If you are still in a hardship position or have questions about payments, the IRS says it will continue to offer help to taxpayers who need it. You may be able to get help from IRS customer service (long delays), and you can refer to the IRS "Paying Your Taxes" webpage.
How to Get Help Paying Your Taxes
You have a tax bill staring you in the face, and you don't know what to do. After you have calmed down and collected your thoughts, discuss the possibilities with your tax professional. You could ask for an extension on your tax return.
But filing an application for an extension on your taxes won’t help, because you still must pay most of the tax by the original due date, even if you are filing an extension.
Your tax bill may include income taxes and self-employment taxes that are due based on your business profit. It may also include payroll taxes that your business has collected and that you cannot pay.
Most businesses pay income tax through the owner's tax return—Form 1040—except for corporations. Your business profit or loss is calculated and reported on a form based on your business type, and it's added to your other income in calculating your total income and tax liability.
Installment Payment Plan Option
You may be able to apply online for an IRS payment plan. if you owe $50,000 or less, you may be able to apply online for a payment plan.
For Individuals. Here's how the installment payment plan works for individuals, including sole proprietors or independent contractors.
You can use the long-term installment agreement if you owe $50,000 or less in taxes, penalties, and interest, and you filed your return.
You can use the short-term payment plan if you owe less than $100,000 in taxes, penalties, and interest. If you use this plan, you must pay within 120 days.
You can qualify to apply online if you meet the requirements above. To apply online, you'll need to create an account with the IRS.
For Businesses. Your business (not including sole proprietors or independent contractors) can apply online for a long-term installment plan if you have filed all the required tax returns, and you owe $25,000 or less in taxes, penalties, and interest.
If you aren't eligible to file your installment plan application online, you can use Form 9465 installment Agreement Request.
You may be required to pay a setup fee, depending on the type of plan and how quickly you pay.
Penalties and interest may continue on unpaid past-due amounts.
Offer in Compromise Option
The IRS Offer in Compromise (OIC) option allows taxpayers (including small businesses) to settle their tax debt for less than the full amount they owe.
To qualify taxpayers, the IRS looks at the ability to pay, income, expenses, and assets owned. You may also qualify for the low-income certification.
Before you apply for an OIC, make sure you have filed all your tax returns and that you have made estimated tax payments. If you have employees, you must also have made all your federal payroll tax deposits.
You can't apply if you are in the bankruptcy process. You can use the IRS Offer in Compromise Pre-Qualifier that takes you step-by-step through a questionnaire.
There are other qualifications and limitations to the OIC program, and you may want to talk to an attorney about the process. For more information, see this IRS Form 656 Booklet or the Offer in Compromise FAQ page.
Borrow the Money From Your Bank
You might ask your bank for additional working capital (basically, a line of credit) to cover this tax bill. It will cost you, but you will avoid any penalties and interest on unpaid taxes.
During the Coronavirus emergency, the Small Business Administration (SBA) has new programs to help small and medium-sized businesses get SBA-backed loans. Learn more about getting a Coronavirus Disaster Loan.
IRS installment plans charge interest and penalties, so you will want to compare the rates on an installment plan to the rate you can obtain for a loan.
Borrow the Money From Yourself
Be careful here. If you have some cash value in a whole life policy or potentially other employee or insurance plans, you might want to use that. If you have money in an IRA and are over 59 1/2, or you are willing to take the penalty, you could cash it in.
You can either loan money to your business or invest in your business. Whether the funds are a loan or investment is a decision based on your particular circumstances. Keep in mind the rates on the various plans, and factor in any penalties when looking for options.
Borrow From a Friend or Family Member
This is not the best situation, because there may be “strings” attached. Alternatives include asking someone to co-sign on a loan for your business. Some other considerations for borrowing from family might be the credit score of the family member.
One similar alternative might be peer-to-peer lending. Peer-to-peer lending allows you to borrow from online lending platforms with funding from multiple investors.
Some of these online lending platforms even have terms for structuring investment from friends and family, which can help with some of the conflicts that arise.
Use Credit Cards
Using credit cards to finance various types of business financing needs is also sometimes helpful. Credit cards offer a revolving line of credit, which gives you an open credit line similar to a more complex subscription line you might get for your business through a bank.
Making Estimated Payments
If it looks like you will have a large tax bill every year, you will need to start planning to pay it off using estimated payments, to avoid fines and penalties for underpayment next year. Starting now, make a general calculation of your business tax bill for the current year, and start making estimated tax payments.
Estimated payments for the year are generally due April 15, June 15, September 15, and January 15 of the following year. Incorporate this annual schedule into your business planning to avoid problems.
If you are in Texas or another area where FEMA issued a disaster declaration due to winter storms in 2021, the IRS has extended the filing and payment deadlines for estimated taxes. Instead of April 15, you now have until June 15, 2021, to pay your first-quarter estimated taxes.
Be sure to include calculations for self-employment tax in your estimates. Self-employment taxes (Social Security/Medicare) are calculated on your business profits or your share of that income if you are in a partnership or LLC.