If you owe back taxes the IRS is constantly adding on interest and penalties to your balance. Your debt will grow about 2% per month in combined interest and penalties, adding nearly 24-25% to your balance every year. If you owe $10,000, after one year your debt grows to $12,400. Worsening your plight is that the IRS applies any payments or refunds to interest and penalties first, causing the "principle" of your tax debt to be reduced more slowly. This is one reason installment agreements are so expensive. Your payments are applied to principle and interest first, but the principle and interest continues to compound each month you are in the installment agreement. Consider these possible solutions:
As a taxpayer you can ask the IRS to reduce some or all of the penalties they may assess. Some of the most common penalties taxpayers face are: failure to file penalties, failure to pay penalties, late filing penalties, late payment penalties and failure to make timely estimated tax payments. According to the IRS penalty relief falls into four (4) categories; Reasonable Cause, Statutory Exceptions, Administrative Waiver, and Correction of Service Error.
One of the IRSís methods of punishing wayward taxpayers is to add penalties and interest to back taxes, failure to file cases or returns that have been filed late, and even if you fail to file the right tax return. Both penalties and interest charges are added automatically. Given these issues, many people have IRS Problems. If this is the case for you, investigating the possibility of removing both penalties and interest charges on the taxes you owe is worthwhile.