If you do owe the money and cannot settle the whole pay you should still take action immediately. Creditors do not like being ignored. The IRS also charges interest and penalties on the amount you owe. A great option if you cannot pay the entire balance is to enter into an installment plan to pay the money owed. The IRS is often very flexible with payment plans and lenders look favorably upon repayment plans when a tax lien is present.
If your business is cash flow positive and you can provide an alternative lender with proof of a repayment plan, you have a much better chance of being approved for a loan. Lenders do not like uncertainty. If you have no repayment plan in place they do not know the eventual monthly amount you will be required to pay the IRS, or whether your assets could be seized and they would have a subordinated claim, or if you’re in danger of filing bankruptcy because of tax issues.
Without an approved repayment plan even an alternative lender will be reluctant to work with you. If you have resolved all these uncertainties, your odds of being approved greatly improve.
The IRS has three payment plans:
- Installment Plans
- Compromise Plans
- Lower debt and request a withdrawal
If you owe less than 50k, you can arrange for an installment repayment plan. Similar to a loan, you’ll make monthly payments for six years. But, also like a loan, you will pay interest on the total amount you owe. Options exist for monthly repayment plans of larger amounts, but the length of repayment term and rates vary and are negotiated on an individual basis.
Compromise plans settle your tax lien by paying as much as you can afford. It will take some work to be approved for a compromise plan and you are asking the government to settle your tax lien for less than what you owe. The IRS will review your revenues and other sources of income in order to judge your repayment ability. In the negotiation process, they will evaluate your business’ strength and possible longevity if they forgive a portion of your tax lien.
The IRS considers compromise plans because they also benefit the government. There are administrative costs associated with servicing an installment plan and the risk of default in the future should you go out of business. The government, like most lenders, prefers to have its money in-hand and dislikes waiting.
The last option is not so much a payment plan as it is a way to remove the tax lien from your record. The IRS typically only files tax liens if you owe more than ten thousand dollars. Once you have paid your debt down below that amount, you can request it be withdrawn from your record. Given the significant impact that a tax lien has on your credit-worthiness, if your debt is not much higher than ten grand it would be a good idea to borrow money from a family member or pull from your personal resources to lower the debt