What To Do If You Owe The IRS?


by Jenny Smedra

What To Do If You Owe The IRS?

I fear the tax season every year. When April rolls around I’m usually a huge ball of nerves until I submit my tax return. While filing taxes is stressful, it became an even more daunting task when I was working overseas. Unfortunately, not only do I have to submit in both countries this year, but it looks like I’ll pay twice as well. Since this is the first time I owe the IRS, I am getting firsthand training on how to pay your tax debts.

Submit taxes abroad as a foreigner

As a US citizen overseas, I have had to file taxes in two countries in the past ten years. Dealing with bureaucratic paperwork will always be a headache. However, this year is going to be particularly complicated as I had a foreign and a domestic income with the same rate of return.

Filing in the USA

In the past, I have met the requirements for foreign income exemption. This tax law states that foreign income up to the threshold set ($ 107,600 for 2020) is tax-free. You can claim this if you are a resident of another country or if you pass the physical attendance test. By having met both of these requirements by 2020, I avoided double taxation and never owed the IRS money.

Filing in Taiwan

As a resident of Taiwan, I paid a flat rate tax. Every May I made the short trip to the tax office and submitted it in person. It only took about 15 minutes for the representative to review my records, get copies of my ID and bank details, and send me on my way.

However, this year I won’t make it back due to strict travel restrictions. That means I have to navigate their website and hope the Google translation from Chinese is easy to follow.

Double income filing

Since I returned home in the middle of the fiscal year, I have to file and pay taxes in both countries for 2020. To add another layer of complexity, my login status is also changing as I now work as an independent contractor. In addition to Taiwan’s flat tax rate, I also have to pay self-employment tax.

Although I know I will owe the IRS this year, I cannot determine how much until I receive income statements for both sources of income. However, I can only file my Taiwanese taxes online between May 1st and May 31st. With the American tax deadline coming first, I found myself in a difficult position. That’s why I decided to seek professional advice to manage the situation.

Decide what to do when you owe money in two countries

Right now I have questions and a return that is way beyond my knowledge of tax law. So I consulted a CPA who specializes in clients with overseas financial concerns. After a short conference call, I had a much clearer picture of what to do. As I am still waiting for documents, we have decided that the best thing to do is to request an extension. Now I can complete my Taiwanese taxes first and have all the official documents to pay what I owe the IRS. Going forward, he also proposed a quarterly payment plan to stay one step ahead of self-employment tax when my income rises.

What To Do If You Owe The IRS?

While I owe the IRS money, there is some good news. They offer several options for solving your tax debt. Based on my financial situation, here are the top three options that I have.

1. Online Payment Agreement

The IRS offers convenient online repayment options as part of the Fresh Start initiative. Since my tax bill is less than $ 50,000, I could apply for an online payment arrangement. As long as you can pay off the full amount within 72 months, you can set the amount you pay each month. Plus, you can even change your payment plan if necessary.

There are some fees when I choose this option. The IRS charges $ 31 for online applications paid by withdrawals and $ 149 if you pay by any other method. However, these are reduced for low income applications.

2. Installment Payment Agreement

The next option is better for those who take more than 72 months to pay off tax debts. If you cannot repay the total amount in the next six years, you can apply for an installment payment agreement. To complete the application, I would need to submit a collection information statement. Then the IRS would analyze my assets and income to see what regular payments I could afford.

Unfortunately, the unpaid portion of the tax bill still incurs penalties and interest. The total interest rate is 3% of the capital. However, the penalty for not paying taxes will be reduced from 0.5% to 0.25%. They are currently accepting applications by phone and mail. However, my CPA told me to expect delays as they are overwhelmed with calls and correspondence.

3. My emergency fund

While I’m not thrilled with it, this is the perfect example of why I have an emergency fund. I’ve made a steady contribution to this fund every month for the past five years. Fortunately, I haven’t had to access my rainy day fund for almost two years. So I’m assuming I’ll have enough to cover the total amount I owe the IRS.

In evaluating my decisions, using my cash reserves seems like the most logical step. I definitely don’t want to go through the hassle of filing additional paperwork or running into debt when I have the funds to pay them. I’d rather pay the amount so that it’s complete, so it doesn’t burden me and I can deal with it. While it will be painful to use such a large portion of my savings, I know I can get it back and rebuild my emergency fund. Sometimes, under certain circumstances, peace of mind cannot be weighed down with a price.

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