When it comes to fulfilling tax obligations, many people automatically put their federal income tax responsibilities ahead of their state balance when they are in a financial jam. It's not difficult to understand why - the fear of the Internal Revenue Service making contact for late payments or failure to pay often makes people prioritize these payments as quickly as possible. However, state tax obligations are important as well, and departments of revenue can take severe legal action against a resident who fails to pay his or her bill in the same way that the IRS can. Therefore, if an individual is facing a large bill and doesn't have the immediate funds to pay the balance, they should explore their state's payment options to avoid interest, penalties and legal action.
First and foremost, it's important to note that although states may offer several different programs to help individuals settle their accounts, the details of these initiatives may vary by location, the type of taxes that are owed and the scenario a taxpayer is facing - such as whether they owe years of back taxes or simply don't have the funds to settle this year's account. A recent article from the Huffington Post noted that residents should speak with their tax preparer and explore all the different plans offered to choose the one that will help them cover their liabilities quickly.
Types of plans
Most states offer a standard installment plan that allows residents to send in a monthly payment to the department of revenue until their account is settled. Although people of varying tax situations may qualify for this type of plan, it's important to keep in mind that interest will continue to accrue until the balance is settled, so paying more than the minimum can help them avoid additional interest charges. Residents should also ask if enrollment in the plan will result in a lien being taken out, which is an option that some states may choose to exercise.
For those who owe several years of back taxes, entering into a Voluntary Disclosure Agreement may be a viable option. VDAs are contracts between the state and individual, in which the latter discloses previous years of unpaid tax liabilities that the state is not aware of in exchange for reduced interest and penalties or other favorable terms.
Offers in compromise are another option for taxpayers, but states may have their own strict requirements for qualifying which vary by location. For those who want to inquire as to whether their tax bill may be reduced through an OIC, speaking with a tax professional may help them determine eligibility.
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