What To Do If You Can’t Pay Your Taxes On Time

As April 15th approaches, I dare say a lot of people expecting a tax refund have already filed taxes and a lot of the rest of us are still sitting on our documents dreading the outcome. For most of my life, it never occurred to me that not paying your taxes by the deadline was an option. I’m not sure what I thought might happen if I didn’t pay what I owed. The sky would fall? Zombie apocalypse?

No zombies, but you do have to act

At any rate, it certainly does happen that a taxpayer for one of many reasons may find they do not have the cash available to pay their bill to the IRS on tax day. If that’s you, don’t fear the zombies – you have options.

What happens if I just bury my head in the sand and don’t file?

This is the typically the worst course of action you can take because the penalty for not filing far exceeds the penalty for not paying your taxes. You would owe 5% per month that your taxes remain un-filed, up to 25% of the tax owed. Now, this means there is no penalty for not filing if you’re due a refund, but why would you not want your refund?

Ok, so I filed, but now I can’t pay.

The IRS provides a phone number for you to call if this is the case: 1-800-829-1040.

Here are a few of the options that may be presented. The best one for you depends on your situation.

1. Abatement – Under the IRS’ First Time Penalty Abatement program, you can ask for penalties to be waived if you haven’t received an abatement in the past three years, you have filed all tax forms due and paid or arranged to pay any outstanding taxes. (in other words, it can’t hurt to ask, but make sure you use the word ‘abatement.’) Here are all the types of relief you may qualify for.

2. Delay payment – If you can’t pay right now but think that you will be able to pay within 120 days (basically 4 months or by August), you can ask for a Full Payment Agreement through the Online Payment Agreement application. Interest and any penalties will continue to accrue, but there is a not a fee to apply for this program.

3. Installment agreement – If you can’t pay what you owe within 120 days, then it’s best to enter into an installment agreement. You can also use the Online Payment Agreement or form 9465 to set up a monthly payment arrangement. The IRS accepts payment in many forms including direct deposit, payroll deduction, check, and cash through retail partners. There is a user fee for this service which may be waived for low income taxpayers, but as long as you make your payments on time, the IRS will be happy. 

THING TO KNOW: In order to set up a payment plan, you must be caught up on all of your tax filings. Also, if you’re in the middle of bankruptcy proceedings you are not generally eligible for an installment plan.

4. Offer in compromise (OIC) – In the rare circumstance where the IRS believes that you are truly not able to pay your tax debt in full and can not use one of the above methods to help, they may accept an offer for an amount less than what is owed to settle the debt. Here’s how it works:

  • There is a $186 application fee so read this guide thoroughly and use the OIC prequalifier tool beforehand to see if the expense of applying makes sense. Check your EAP as well – you may qualify for legal help in applying.
  • If you are already in bankruptcy proceedings or have not filed all tax returns due to date, you are not eligible for an OIC. You also must have paid all taxes due to date for the current year.
  • Apply by submitting Form 656, Form 433-A or B (OIC), the application fee and an initial offer payment, if applicable.

Does it make sense to pay with a credit card?

It can be tempting to just use a credit card to get the IRS off your back, but that might not make the most sense. As of the first quarter of 2019, the IRS is charging an interest rate of 6%, far less than what most credit cards will charge you, so you may want to look into an installment agreement first. 

How to keep this from happening again

You can only have one installment agreement at a time, so you want to make sure that if you’re using it to get caught up on a prior year that you’re paying enough in this year and going forward to avoid another big tax bill that you can’t afford. Use the IRS W-4 calculator tool each year to make sure your employer is withholding the right amount of taxes from your check. (this document has helpful step-by-step instructions for using the calculator)

If you are self employed, be sure to keep up with your quarterly estimated tax payments. Consider setting aside a portion of all income into a special account to use for paying the estimated taxes.

There are options, but you have to ask

Hopefully, one of these options will work for you. Remember, while the IRS may have earned a reputation of being heartless in the past, they do have remedies to help those who are willing to work with them on payment options. It might turn out to be a much better experience than you think! You just have to ask.

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