This does not mean that your tax debt goes away, though.
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You might also be able to get the IRS to temporarily suspend collection of your tax debt if you're facing a financial hardship (i.e., paying your taxes now would prevent you from covering your basic living expenses). The IRS generally approves an OIC if it thinks the amount you offer is the most it can reasonable expect to collect. However, before the IRS will consider an OIC, you must file all tax returns due and make any estimated tax payments required for the current year. Generally, with an OIC, you agree to pay a reduced amount of tax. If you want to request a penalty waiver, attach a statement to your return fully explaining your reason for filing or paying late.Īnother option is to request an offer in compromise (OIC). A lack of funds, in and of itself, is not a sufficient reason for failing to file or pay on time, although the underlying reason for your lack of funds might satisfy the IRS. What's a good reason? Think fire, natural disaster, serious illness and the like. If you have a good explanation for missing the filing or payment deadline, you might be able to avoid the penalties (but not interest). A penalty amount that appears on your bill is generally the total amount of the penalty up to the date of the notice, not the penalty amount charged each month. When you finally pay any tax due, the IRS will first apply the payment to the tax you owe, then to any penalty, and then to any interest.
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As you can see, the longer you wait, the higher the penalties grow. Overall, the penalty can be as high as 25% of the unpaid tax. However, the penalty is only 0.25% for each month, or part of a month, in which an IRS installment agreement is in effect. The rate jumps to 1% ten days after the IRS issues a final notice of intent to levy or seize property. The late-payment penalty is 0.5% of the unpaid balance for each month (or part of a month) the tax isn't paid.