Hopefully you’re about wrapped up with your taxes (they are due in less than 1 month), but you may be worried about paying your tax bill. Owing money to the government can be scary, but here are some suggestions about what you can do if you can’t pay your taxes.
On a side note, I’m just a blogger, not a tax professional, so consult a real tax professional if you think you fall into this situation. There are options, but you need to know what you are doing.
Step 1. Always File Your Return
Even if you know you’re going to owe the IRS big time and you can’t pay, it is important that you still file your tax return. The reason – the penalty for not paying your taxes is lower than the penalty of not paying your taxes. This is part of the government’s scheme to put a friendlier face on government, even though it isn’t really.
If you don’t file your tax return, you will pay a failure to file penalty, which is currently 5% of the unpaid taxes per month late.
However, if you just don’t pay, you have a failure to pay penalty, which is currently only 0.5% of the unpaid taxes per each month late.
In both cases, you will also owe interest beyond the penalties, which is currently about 4% annually, but this rate does change quarterly.
That is why even in a worst case scenario, you should use something like the TurboTax to file your federal taxes for free.
Step 2. Tell The IRS Your Problems
Once you’ve filed, but haven’t paid, you are in a better position, but you still need to arrange some way to pay. There is no easy way out of paying the government your tax money. However, the IRS does offer a few options that can help, but you have to work with the IRS and tell them your problems.
This is one of the most common payment methods for individuals who owe taxes. You and the IRS will come to an agreement that will allow for reasonable monthly payments until the balance is paid off. If you don’t owe more than $25,000, this is probably a good option for you. However, if you have already done an installment plan before, your options of getting it again are much slimmer.
Partial Payment Installment Plans
This is the second most common settlement the IRS offers taxpayers who can’t pay. It is similar to the regular installment plans, except that it has a lower payment and it is drawn out longer. The benefit for the taxpayer is that the statute of limitations for collecting the debt will most likely run out before it is fully collected, so you don’t repay the entire amount owed. It also gives you more options monthly since your payment is lower.
Offer in Compromise
This is an agreement that the IRS accepts you to repay less than you owe. It is not common, and the IRS will typically only agree to one if the odds of recovering the full amount are very low.
If you are only in a temporary bind, the IRS offers a program called Currently Not Collectible Status. If you’re in a hardship situation where the collection of the IRS debt would be unfair (because the loss of income to those payments would prevent purchasing necessities such as food or shelter), they can declare your debts to be currently not collectible. This would give you an 18 month reprieve from paying the IRS. However, during this time, your debt continues to amass interest and penalties, so only utilize this option if you do plan on paying as soon as you’re able.
Readers, have you ever been forced into a situation where you couldn’t pay the IRS? Was the IRS helpful, or were they mean G-Men in suits pressuring you to pay?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.