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Old 08-14-2007, 10:34 PM
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What options are available to a taxpayer when he cannot pay his tax liability?

Dear Taxguru,

What can I do if I cannot pay my tax liability for 2006? I have simply filed an extension but have not paid my projected tax liability.

Can you please suggest some strategies for me ? Thanks



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Old 08-22-2007, 09:24 AM
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The options available to taxpayers who cannot pay their tax liability in full!

If you cannot pay the full amount due with your return, you can request to make monthly installment payments for the full or a partial amount. However, you will be charged interest and may be charged a late payment penalty on the tax not paid by the date your return is due, even if your request to pay in installments is granted.

If your request is granted, you must also pay a fee to set up the installment agreement. To limit the interest and penalty charges, I would recommend that you pay as much of the tax as possible with your return. But before requesting an installment agreement, you should consider other less costly alternatives, such as a bank loans, home equity loan or credit card advances offerred at low interest rates.

To ask for an installment agreement, use Form 9465, Installment Agreement Request. You should receive a response to your request within 30 days. But if you file your return after March 31, it may take longer for a reply.

The IRS specifically states that "In addition to paying by check or money order, Taxpayers may also use a credit card or EFTPS to make installment agreement payments".

The IRS will allow the taxpayers an opportunity to use the installment agreement under their "Guaranteed availability of installment agreement rule."

The IRS will agree to accept the full payment of your tax liability in installments if, as of the date you offer to enter into the agreement the following;

1. Your total taxes (not counting interest, penalties, additions to the tax, or additional amounts) do not exceed $10,000,

2. In the last 5 years, you (and your spouse if the liability relates to a joint return) have not:

a. Failed to file any required income tax return,
b. Failed to pay any tax shown on any such return, or
c. Entered into an installment agreement for the payment of any income tax,

3. You show you cannot pay your income tax in full when due,

4.The tax will be paid in full in 3 years or less, and

5.You agree to comply with the tax laws while your agreement is in effect.

Clearly, the installment method has certain stringent conditions as mentioned above and for tax liabilities upto $10,000 the taxpayer is oligated to meet the liability over the maximum allowable period of 3 years.

I would clearly consult a CPA or a tax professional to determine the best approach for your unique case..

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