Archives for July 2023

How to Avoid the IRS Tax Underpayment Penalty

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Are you stressed out and weighed down financially by the skyrocketing amount of IRS tax underpayment penalties? In this comprehensive guide, we’ll discuss different strategies that will help you take preventive action and avoid incurring these costly penalties. By learning about the finer nuances of tax regulations and planning in advance, you can enjoy a seamless filing process and keep your hard-earned money safe. So, let’s get started and find out how to steer clear of the dreaded IRS tax underpayment penalty!

If you’re among the millions of taxpayers suffering from year-on-year estimated tax penalties, you’re not alone. The latest IRS figures from 2015 show that approximately 10 million taxpayers were each hit with an average fine of $130. Oftentimes, business owners, freelancers, and investors find it hard to accurately calculate their estimated liability due to varying levels of income. To help you avoid underpayment penalties in the future, here are a few tips to make the process of paying estimated taxes straightforward and maintain financial stability:

Make Estimated Tax Payments Based on Your Previous Year’s Liability

To prevent underpayment penalties, it is important to ensure that you make estimated tax payments throughout the year that total at least 90% of your current year’s tax liability or 100% of your previous year’s tax liability. This can be challenging for freelancers, business owners, and those with fluctuating investment incomes, as it requires accurate estimation of payments.

To avoid underpayment penalties, base your estimated payments on 100% of your previous year’s tax liability by dividing the taxes you owed last year by four to calculate the amount for each of the four quarterly estimated tax payments for the current year. Paid on time, these payments will help you avoid any surprises come tax season.

However, be mindful of two crucial factors when estimating your taxes for the year:

  • When estimating payments for the current year, it’s important to base the amount on the total taxes owed rather than the taxes paid. For instance, if you owed $15,000 in taxes last year but only paid $14,000, you should still make estimated quarterly payments based on the $15,000 owed. Failure to do so could result in underpayment penalties.
  • For people with an adjusted gross income (AGI) exceeding $150,000 (or $75,000 for married taxpayers filing separately), the estimated tax payment rule is slightly different. In order to avoid penalties, they must pay 110% of the prior year’s tax liability instead of 100%. For example, if their AGI was $160,000 last year with a tax liability of $40,000, they would need to pay at least $44,000 in estimated taxes for the current year.

Make Estimated Tax Payments on an Annualized Basis

For those whose incomes vary month to month or by season, the IRS offers annualized payments to make estimated tax payments less challenging during leaner times. This approach divides your yearly estimated tax liability according to your cash flow throughout the year. For example, if a snowplow business earns $20,000 during the year, but mainly in fall and winter, annualized payments prevent large summer payments when cash flow is low.

Though annualized estimated tax payments require more record-keeping and effort than making four equal payments, it is important to note that you must still pay estimated taxes on at least 90% of your annual income to avoid penalties. When using this method, you must track your income and expenses throughout the year and adjust your estimated tax payments accordingly every quarter. If you need assistance with calculating estimated tax payments, consult with a tax professional. 

Increase Workplace Withholding

If you have income subject to withholding, such as from a full-time job, you can adjust the withholding amount to cover the income from all your sources, eliminating the need to pay estimated taxes. This can be done even if you have other sources of income, such as freelance work or pension income, that are not subject to withholding.

This approach is also beneficial for married couples in which one partner’s income is subject to withholding and the other’s is not. For example, if one spouse is a salaried accountant and the other is a freelance writer, the spouse with the salaried job can adjust their withholding to account for their partner’s untaxed income. IRS tax filing regulations consider both spouses’ incomes jointly, meaning that this approach helps them avoid any issues with estimated taxes and potential penalties.

When Estimated Tax Payments Are Required

Estimated tax payments are required for certain income types not subject to withholding, such as self-employment income, dividends and interest, rental income, alimony, and prizes or other winnings. When paying estimated taxes, you cover both income taxes and self-employment taxes.

You must typically pay estimated taxes if you anticipate needing to owe at least $1,000 in taxes after subtracting out any withholding and refundable credits, and when that amount is greater than either 90% of what your current year’s tax return displays or 100% of what your previous year’s tax return displayed.

Penalties for Underpaying Estimated Taxes

The penalty rate for underpayment of estimated taxes may vary annually, and the amount depends on your specific situation. Typically, the Internal Revenue Service (IRS) calculates any penalty you owe for underpayment of estimated taxes and sends you a bill for the penalty amount. However, in certain situations, you may need to calculate the penalty yourself.

The IRS Form 2210 provides two options for calculating the penalty for underpayment of estimated taxes: the short and regular methods. After tracking the amount of tax that was underpaid, Form 2210 will direct you in determining the penalty for that amount. The penalty amount is based solely on the value of the underpayment.

In general, if you fail to make at least a minimum payment for a specific payment period, you will owe a penalty. Similarly, if you miss a payment entirely for a particular payment period, you will owe a penalty from the due date until the date the payment is made.

When Penalties for Underpayment of Estimated Taxes Are Applied

If you do not pay the correct amount of taxes through withholding or estimated tax payments, you may be subject to a penalty. Even if you are entitled to a tax refund, you could still face penalties for not paying enough taxes by the due date of each estimated tax payment.

There are a few situations where you may not be penalized for underpaying estimated taxes. If your total tax liability is less than $1,000, or if you had no tax liability in the previous year and were a U.S. citizen or resident for the entire year, you will not face a penalty. The same applies if you were not required to file a tax return for the previous year.

When Penalties for Underpayment of Estimated Taxes Can Be Waived

The IRS has the authority to waive the penalty for underpaying estimated taxes in certain situations. One such situation is if you are able to show that your failure to make an estimated tax payment was due to a casualty, disaster, or other unusual circumstance. In these cases, the IRS may determine that it would be unfair to impose the penalty and may choose to waive it. This provision allows for flexibility and understanding in situations where taxpayers may have been unable to meet their tax obligations due to unforeseen events.

Another scenario where the IRS may waive your penalty for underpayment of estimated taxes applies if you meet the following requirements:

  1. You retired after age 62, or you became disabled.
  2. You had reasonable cause for not making the payment.
  3. You did not willfully neglect to make the payment.

To request a waiver of the penalty for underpaying estimated taxes, you must meet certain conditions. If you believe you qualify, you must file IRS Form 2210 and include a statement explaining why the estimated tax payment was not made. 

Specify the time period for which you are requesting a waiver and provide documentation such as evidence of age and retirement date, proof of disability, or documentation of a casualty, disaster, or other unusual situation. This could include a police report or an insurance company claim or report.

Strategies to Prevent Underpayment of Estimated Taxes

To prevent underpaying your estimated taxes and avoid IRS penalties, follow these simple steps: 

  • Ensure that your estimated tax payments, combined with any tax withholding and refundable credits, are at least 100% of the total tax paid in the previous year for incomes under $150,000, or 110% for those above $150,000. 
  • If you can accurately estimate your current year’s income, pay a minimum of 90% of the tax owed on that income. This may be challenging if you cannot precisely predict your annual income. 
  • Use IRS Form 1040-ES to calculate your estimated tax accurately. 
  • Adjust your tax withholding to fit your circumstances, such as having additional taxes withheld from your primary job’s paycheck to cover taxes owed on rental or self-employment income, potentially eliminating the need for estimated tax payments.

IRS Tax Penalties Guide: Strategies to Prevent or Minimize Them

Saving on Penalties

Tax filing and payment processes don’t always go smoothly, even with the best intentions. You may encounter an IRS tax penalty due to underestimated quarterly payments, missed deadlines, or returned checks. While mistakes are inevitable, understanding the different IRS penalties and their calculations is beneficial. Additionally, being aware of your options in case of an IRS penalty can help you navigate the situation more effectively.

Common Tax Penalties

Below are four prevalent tax penalties imposed by the IRS on taxpayers, along with suggestions to prevent them:

Failure to File

If you need more time to file your tax return, you can apply for an extension until October 15, 2023. Failing to request an extension or missing the extended deadline will result in a penalty from the IRS. The penalty is 5% of the unpaid tax for each month or partial month that your return is late, with a maximum limit of 25% (5 months) of your balance. If your return is over 60 days late, a minimum penalty will be applied. For returns due after January 1, 2020, the minimum penalty is either $435 or 100% of the tax owed, whichever is lower.

To avoid a failure-to-file penalty, make sure you submit your tax return by the due date, even if you can’t pay the full amount owed. If you expect a refund, the IRS won’t penalize you for filing late. However, if you don’t file within three years of the original due date, you may lose your refund.

Failure to Pay

Whether you file your tax return on time or obtain an extension, you must still pay the tax due by the deadline set by the IRS. If you fail to do so, you will be charged a failure-to-pay penalty. This penalty is equal to 0.5% of the unpaid tax per month, with a maximum penalty of 25% of the total tax due. However, if you set up an installment agreement with the IRS, the failure-to-pay penalty is reduced to 0.25% per month for the duration of the agreement.

It’s important to note that both the failure-to-file and failure-to-pay penalties are charged for a full month, even if you pay the outstanding balance before the month is over. However, if both penalties are applicable in the same month, the failure-to-file penalty is reduced by the amount of the failure-to-pay penalty, ensuring that the combined penalty does not exceed 5% per month.

To avoid incurring penalties for failure to pay your taxes on time, it is important to ensure that you pay the full amount by the deadline, even if you have already requested an extension. If you find that you owe more than you can afford to pay, it is advisable to make a payment for as much as you can by the deadline and stay on top of any remaining balance, paying it off as soon as possible. If you are unable to settle the outstanding amount within a few months of the due date, it would be wise to consider requesting an installment agreement.

Failure To Pay Proper Estimated Tax

The IRS operates on a system known as “pay-as-you-go,” which means that taxpayers are required to make regular tax payments throughout the year rather than waiting until the end. If an individual’s tax liability exceeds $1,000, they may be subject to penalties. To avoid these penalties, taxpayers can choose to have taxes withheld from their paychecks or make estimated quarterly payments.

The penalty for underpaying estimated taxes is determined by the IRS based on calculations of the amount you should have paid each quarter. This penalty is calculated by multiplying the difference between your payment and the required payment by the interest rate for that period. It is possible to incur a penalty for one quarter but not others. 

To avoid or reduce estimated tax penalties, you can adjust your tax withholding from your paycheck or make quarterly payments based on your estimated tax bill. These payments are typically due on April 15, June 15, September 15, and January 15. If any of these dates fall on a weekend or legal holiday, the deadline is extended to the next business day.

The IRS also provides two “safe harbor” methods to determine penalty eligibility. If you meet one of these requirements, the IRS will not charge an estimated tax penalty, even if you owe more than $1,000 at year’s end.

The requirements are as follows:

  • Pay 90% of the tax you owe for the current year. Estimate your total liability and pay at least 90% of this amount in four equal installments or through paycheck withholding.
  • Pay 100% (or 110%) of last year’s tax bill. Pay the full amount of tax shown on your prior-year tax return before applying estimated payments, withholding, or refundable tax credits. If your adjusted gross income exceeds $150,000 (or $75,000 for married individuals filing separately), the safe harbor amount is 110% of your prior-year tax.

Dishonored Check

To avoid the dishonored check penalty imposed by the IRS, it is important to ensure that you have sufficient funds in your bank account before submitting a check to cover your tax bill. If the check bounces, the penalty is either 2% of the check’s value (unless it is less than $1,250) or $25, whichever is lower. To prevent this penalty, make sure you have enough money in your account or consider signing up for overdraft protection with your bank.

How to Remove Tax Penalties

In an ideal world, dealing with IRS penalties would be unnecessary. However, many individuals face tax penalties, and the good news is that the IRS is often willing to work with those who make mistakes through a process called penalty abatement.

There are two common reasons the IRS might consider penalty abatement:

1. Reasonable Cause:

If you failed to file on time or pay the tax you owe due to extenuating circumstances, the IRS might agree to waive your penalties. Examples of reasonable cause include a house fire, natural disaster, illness, or the death of an immediate family member.

2. First-Time Penalty Abatement:

If you usually fulfill your tax filing responsibilities but missed the filing deadline or payment due date, the IRS may grant you a one-time exception. To qualify, you must have filed all your tax returns, paid your outstanding balance or set up an installment agreement with the IRS, and have no prior penalties in the past three years.

Frequently Asked Questions

What Causes the IRS to Impose an Underpayment Penalty?

The penalty for underpayment of estimated tax applies to individuals, estates, and trusts if you fail to pay sufficient estimated tax on your income or make late payments. This penalty may be imposed even if you are eligible for a refund. To avoid this, learn how to calculate and pay your estimated tax in a timely manner.

What Factors Can Exempt You From Underpayment Penalty?

To avoid the underpayment penalty, you can meet either of these criteria: 

1. If your tax return shows that you owe less than $1,000.

2. If you have paid at least 90% of the current year’s tax due or 100% of the previous year’s tax owed, whichever is smaller.

What Is the Required Amount of Estimated Taxes to Pay in Order to Prevent Penalties?

If you meet any of the following conditions, the IRS will not impose an underpayment penalty on your taxes:

1. You pay a minimum of 90% of the tax owed for the current year.

2. You pay 100% of the tax owed for the previous tax year.

3. You owe less than $1,000 in tax after taking into account withholdings and credits.

How Can I Prevent an IRS Underpayment Penalty?

To avoid penalties for underpaying taxes, it is important to accurately report your income and deductions on your tax returns. Make sure to make timely payments of the amount you owe by the due date. If you are unable to meet these requirements, you may request an extension for filing your return or set up a payment plan with the IRS.

In conclusion, it is essential to navigate the complex rules and regulations of tax filings to avoid penalties for underpaying taxes. By accurately reporting income and deductions, making timely payments, and using available options such as extensions and payment plans, taxpayers can minimize their risk of incurring penalties and maintain good standing with the IRS. Being informed, proactive, and organized in managing tax obligations can help alleviate stress and financial burdens associated with underpayment penalties.

Let us help you avoid the IRS tax underpayment penalty. 

Understanding and Avoiding the IRS Tax Underpayment Penalty: A Comprehensive Guide

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Navigating the complexities of the tax system can be challenging, especially when it comes to understanding the potential consequences of underpaying your taxes. The IRS tax underpayment penalty is an essential fee to be aware of, as it can significantly impact your financial situation.

In this comprehensive guide, we will explore the ins and outs of the IRS tax underpayment penalty, including how it is calculated, the factors that contribute to it, and the proactive steps you can take to minimize your risk and avoid costly penalties. By gaining a thorough understanding of this crucial tax concept, you can make well-informed decisions and ensure compliance with IRS regulations.

What Should I Do If I’m Unable to Pay My Taxes?

Stay calm – you might be eligible for a self-service, online payment plan (including installment agreements) that enables you to gradually pay off your outstanding balance. Upon completing your online application, you’ll be instantly notified of your payment plan’s approval status, without needing to contact the IRS. Online payment plans are processed faster than requests submitted with electronic tax returns, even when the new tax hasn’t been assessed yet.

Online Payment Plans Include:

  • Short-term payment plan – This plan has a payment period of 120 days or less and requires a total amount owed of less than $100,000, including combined tax, penalties, and interest. 
  • Long-term payment plan – This plan has a payment period exceeding 120 days, involves monthly payments, and necessitates an amount owed of less than $50,000, encompassing combined tax, penalties, and interest.

If the IRS approves your long-term online payment plan (installment agreement), a setup fee may be applicable based on your income. If you already have a payment plan, you might be eligible to use the online payment plan option to modify your existing agreement. Online changes can include updating payment dates, amounts, and bank information for Direct Debit Installment Agreements.

If you’re not eligible for an online payment plan, you can also request an installment agreement (IA) by submitting Form 9465, Installment Agreement Request, to the IRS. Upon IA approval, a setup fee may be charged depending on your income. For more information, refer to Tax Topic No. 202, Tax Payment Options.

When requesting an IA, the pending period extends or suspends the initial ten-year collection period. An IA request typically remains pending until it is reviewed, the IA is established, or the request is withdrawn or denied. If the requested IA is rejected, the collection period’s progression is suspended for 30 days. Similarly, if you default on your IA payments and the IRS intends to terminate the agreement, the collection period is suspended for 30 days. 

If you choose to appeal either an IA rejection or termination, the collection period’s progression is suspended during the appeal process until the appealed decision becomes final. For more information, refer to Tax Topic No. 160, Statute Expiration Dates.

What Are the Consequences of Not Filing or Paying Taxes Owed to the IRS?

You might question the need to submit your tax return if you are unable to pay your tax bill. However, it is crucial to do so. If you have unpaid back taxes or current taxes, you could face substantial penalties and interest accumulation over time for non-payment. The Failure to Pay Penalty begins at 0.5% of your outstanding balance per month (limited to 25% of the back taxes you owe). The interest rate for underpayment of taxes is 6% as of May 2019, but it may vary quarterly.

Actions to Take When You Owe Money to the IRS

Being aware of your choices can help you decide what steps to take if you owe money to the IRS, allowing you to develop a strategy. Here are some prevalent options for individuals who owe taxes but are unable to pay them:

1. Establish a Payment Plan With the IRS

Taxpayers have the option of establishing payment plans with the IRS, known as installment agreements. Depending on your individual circumstances — such as the amount owed and how long you can take to pay it off — there are different types of agreements available. For instance, if you are able to pay your balance in full within 120 days, it may be more beneficial to make a lump-sum payment rather than setting up an installment agreement. If your financial situation does not allow you to pay the full balance within 120 days, however, an installment agreement can help spread out the payments over a longer period of time.

Fees and Costs

If you are looking for a way to manage your tax debt more effectively, one of your options is to apply for an online payment agreement. The application fee for an online payment agreement is $149, or you can opt for an electronic payment of $31. Those who qualify as low-income taxpayers can receive a reduced fee of $43, by submitting Form 13844. 

To initiate an online payment agreement, you will need to complete Form 9465. For installment agreements of $50,000 or less, you do not need to submit a financial statement. However, it is important to consider what is best for your individual circumstances, so it is recommended to consult with an expert in tax debt to assess your situation and identify the best solution.

Advantages and Disadvantages

By setting up an installment agreement, the penalty on your unpaid balance decreases to 0.25% per month until the full balance is paid on schedule. Interest is charged at the short-term federal rate plus 3% (interest rates may vary each quarter). The IRS can generally void agreements if payments are not made on schedule.

Forms

If the balance is more than $50,000, Form 433-A or Form 433-F is required. You can also make payments through payroll deductions using Form 2159, Payroll Deduction Agreement.

2. Ask for a Brief Extension to Settle the Entire Amount

The IRS offers taxpayers up to 120 days to pay their entire tax balance.

Fees and Costs

There is no fee for requesting the extension. However, a penalty of 0.5% per month applies to the unpaid balance.

Required Action

Complete an online payment agreement, call the IRS at (800) 829-1040, or seek assistance from us. 

Advantages and Disadvantages

This option is suitable for taxpayers who require a brief period to pay their full tax bill. The IRS charges interest at the short-term federal rate plus 3% (interest rates may vary each quarter). With short-term extensions, you avoid the installment payment application fee (see #1), but not late-payment penalties and interest.

3. Request a Financial Hardship Extension for Tax Payment

The IRS provides options for individuals facing financial hardship, including currently not collectible status and the Offer in Compromise. To qualify for a hardship-based extension, you must demonstrate that paying the taxes owed would result in financial hardship, as per the IRS financial standards.

Fees and Costs

There is no cost to apply for a hardship extension. While no penalties apply, interest is calculated at the short-term federal rate plus 3% (interest rates may vary each quarter).

Required Action

Submit IRS Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship. Include a statement detailing your assets and liabilities.

4. Get a Personal Loan

You may consider requesting a loan from a personal contact, such as a friend or family member, to help cover your tax debt. Fees and costs can vary significantly depending on the lender. This option might be cost-effective, but it’s essential to use your best judgment when making such a decision.

5. Borrow From Your 401(k)

If your 401(k) plan permits this type of loan, you are generally limited to 50% of your account balance, with a maximum of $50,000, and must repay the funds within five years.

Fees and Costs

There may be a minimal fee, and the plan is required to charge interest.

Required Action

Consult your plan administrator for details.

Advantages and Disadvantages

If allowed, a loan from your 401(k) plan can serve as a convenient and affordable source of cash to pay current or back taxes owed. However, the loan may negatively affect your future retirement savings if not repaid. Failure to make timely payments, leaving your company without repaying the loan, or plan termination will result in the loan being treated as a taxable distribution. Additionally, if you are below the age of 59½, a taxable distribution is subject to a 10% early distribution penalty.

6. Use a Debit/Credit Card

Various service providers offer payment options for tax balances.

Fees and Costs

These vary, typically around $2.49 to $3.95 for debit card payments or 1.87% to 2.35% of the tax balance due for credit card payments.

Required Action

Consult the IRS for a list of approved service providers.

Advantages and Disadvantages

This payment method offers the convenience of making payments anytime, anywhere with greater control and flexibility. You may also enjoy other benefits such as the ability to earn points, miles, or other credit card rewards. However, always keep in mind that having high credit card balances may hurt your credit score and can make it difficult to handle unmanageable debt. Be sure to use your credit card responsibly and understand the risks before you choose this payment method.

Uncertain About How to Handle Your IRS Debt? Let Us Help!

Our tax specialists can assist you in determining the appropriate course of action if you owe taxes but are unable to pay. Seek guidance from our reliable IRS experts.

If you’re unable to pay your taxes, the initial step is to recognize that there’s an issue at hand. To put it plainly: You have a tax obligation, but you lack the funds to fulfill it. Instead of focusing on fear or uncertainties, tackle the situation one step at a time.

Step 1: Submit Your Tax Return by the Regular Deadline 

Submit your return even if you’re unable to pay the taxes on time. Contact a professional as soon as possible to assist you in filing your taxes. We might be able to identify credits and deductions that can reduce your tax obligation. Remember, every dollar counts when you owe the IRS!

You may assume it’s better to delay filing your taxes if you owe the IRS money. However, the penalty for not submitting a return or submitting it late can be ten times higher than the penalty for not paying on time.

Keep in mind that even if you complete your tax return in February or March, the tax payment isn’t due until Tax Day. Therefore, waiting until the deadline to pay may provide you with a few months to save or earn extra money.

You might wonder if a tax extension would grant you additional time to pay. Unfortunately, it does not. An extension only gives you more time to file, but your taxes are still due on Tax Day – meaning if you pay late, you’ll face interest and penalties on any outstanding taxes for the year. So, ensure that you file your tax return on time!

Step 2: Pay as Much as Possible by the Tax Deadline

If you find yourself unemployed, don’t panic. Temporarily set aside the tax bill and prioritize the essentials for survival. Focus on the “Four Walls” — food, utilities, shelter, and transportation — before anything else. Once you’ve provided for your basic needs, pay the IRS what you can.

Here are some other tips to reduce the amount you owe at tax time:

  • Reduce Your Taxable Income: Look for ways to reduce your taxable income by making contributions to retirement accounts and taking all the available deductions and credits you qualify for.
  • Prepay for Expenses: Consider prepaying your estimated taxes and any other expenses you can legally pay now to reduce your taxable income.
  • Make Charitable Donations: Consider making charitable donations if you are able to. Donations to qualified charities are typically deductible so you will reduce your taxable income by the amount of the donation.
  • Delay Income: Delay income where possible, including delaying any required bonus payments or other income that you know will come.
  • Utilize Tax-Deferred Accounts: Take full advantage of tax-deferred accounts like Individual Retirement Accounts (IRAs), 401(k)s, and other types of retirement savings accounts. The taxes you’ll pay in future years will generally be lower than if you paid them today.
  • Increase Your Withholdings: As long as you are the recipient of a refund, consider increasing your withholdings if you know you will end up with a large tax bill. This way you can spread out your payments.

Step 3: Continue Paying the Taxes You Owe Even After Filing, and Discuss a Payment Plan With the IRS

After Tax Day, you’ll have a month or two before the IRS contacts you regarding your outstanding taxes. During this period, aim to allocate every available dollar toward the balance with the goal of paying it off before they reach out to you. 

If you can’t pay your tax bill by the deadline, consider applying for a payment plan on the IRS website. You can bypass lengthy phone wait times and establish the plan online. The IRS provides short-term payment plans (120 days or fewer) for bills under $100,000 and long-term monthly plans for balances below $50,000. A fee between $31 and $130 may be required, but this could be waived if you have a low income. Focusing on your tax debt within a debt snowball strategy can help you pay off your balance in under a year.

Step 4: Resolve the Issue: Avoid Unmanageable Tax Bills in the Future

Partner with us to avoid encountering unmanageable taxes in the future. This could include setting aside earnings from a side business, making quarterly tax payments, or modifying your paycheck withholding. Regardless of the issue, a tax expert can pinpoint it and help you address it proactively.

What Occurs if You Fail to File Your Taxes?

Neglecting to file a tax return when you have outstanding taxes is not just inadvisable but also unlawful, and the IRS will impose penalties. The Failure to Pay Penalty equates to 5% of your unpaid taxes for each month they are overdue, capping at 25% of your tax bill after five months. The IRS applies interest on top of these penalties. Failing to file a return could lead to imprisonment for up to a year for each year you omit filing. Nevertheless, the IRS generally pursues alternative solutions to address issues with taxpayers before considering imprisonment.

Hence, regarding tax submission, the saying “better late than never” truly holds true! You will be in a more favorable situation with the IRS if you file your tax return, even if you cannot pay your bill right away. Avoid delaying until the IRS takes action against you. By filing, you will also gain the advantage of decreased penalties and interest.

What Happens If You Submitted Your Taxes But Can’t Pay Right Now?

If you have submitted your tax return but are unable to pay your bill, there are options for arranging a payment plan. The Failure to Pay Penalty amounts to 0.5% per month, reaching a maximum of 25% of your unpaid taxes. This penalty is considerably lower than the Failure to File Penalty, highlighting the significance of consistently filing your taxes in a timely manner. By actively setting up a monthly payment plan, the IRS will decrease your Failure to Pay Penalty to 0.25% per month until your bill is completely settled.

What If I Pay My Taxes Late?

If you are experiencing financial difficulties, such as the death of a partner or unemployment, you can request the IRS categorize your bill as “currently not collectible.” This provides you more time to pay off your debt while halting collection efforts for a certain period of time. Keep in mind, though, interest and penalties will continue to add up until your bill is settled. Another solution is to apply for an Offer in Compromise (OIC). 

This enables you to consult with the IRS for a smaller payment than the amount you owe. While filling out an OIC, you present a payment calculation to the IRS, asking them to consent to your lower rate. The IRS evaluates your offer based on your income, expenses, ability to pay, and the value of your assets. It’s important to note that it is tricky to be eligible for an OIC, as approvals are generally rare. Typically, those in extreme financial distress are given this type of tax assistance.

Can You Go to Jail if You Don’t Pay Taxes?

Although the era of Charles Dickens and debtors’ prisons has long passed, with their abolishment in the United States in 1833, failing to pay your taxes can still lead to significant repercussions. If you have an unpaid tax bill and show no intention of settling it, the IRS may implement enforcement measures against you. These measures can involve wage garnishment, levying your bank account, putting a lien on your property, or even seizing your assets.

In case you deliberately hide significant income sources, submit fraudulent tax returns, or neglect to file a return to avoid taxes, you may be accused of tax fraud or tax evasion. The severity of your actions may determine whether you face imprisonment for these offenses. For example, the notorious mobster Al Capone was sentenced to 11 years in prison for tax evasion, as it was the only offense the FBI could successfully prosecute him for.

What Is the Duration to Settle Your Tax Debt With the IRS if You Owe Them?

The IRS offers taxpayers up to 120 days to settle their total tax balance, free of charge. However, the amount unpaid will incur a monthly penalty of 0.5%. To obtain an extension, an online payment agreement can be filled out, or the IRS can be reached at (800) 829-1040 for assistance. Alternatively, you can have one of our professionals take care of the process for you.

What Occurs if You Have an Outstanding Debt With the IRS and Fail to Make a Payment?

If you fail to pay your taxes, you will be charged a penalty of 0.5% for each month (or portion thereof) up to a maximum of 25% of the total balance due. If you establish a payment plan, the penalty rate is decreased to 0.25% each month. Both interest and penalties increase the amount that you owe.

What If You Owe the IRS Over $100,000?

For individuals owing a tax debt in excess of $100,000, the IRS may take various courses of action, such as issuing a Notice of Federal Tax Lien to make known the debt, garnishing wages, confiscating funds from bank accounts, and invalidating or rejecting passport applications.

How Do I Ask the IRS for Tax Forgiveness?

Use Form 843 to request a refund or apply for an abatement of specific taxes, interest, penalties, fees, and additional tax charges. If you owe the IRS and cannot pay, it is essential to take immediate action to address the situation. Do not wait until you have incurred an IRS tax underpayment penalty. 

The IRS provides various options, such as payment plans and extensions, to assist taxpayers in managing their tax debt. Ignoring the issue will only lead to increased penalties, interest, and potential legal action. By being proactive, seeking professional advice, and exploring available solutions, you can minimize the financial impact and work towards resolving your tax obligations. 

Keep in mind that the IRS is more likely to cooperate with those who show a genuine effort to fulfill their tax responsibilities.

How to Get Tax Debt Relief When You Can’t Pay Your Taxes

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If you are unable to pay your taxes on time, don’t worry — you are not alone. Over five million Americans require some type of alternative payment option each year. The IRS offers four alternatives in these cases: an extension to pay over a period of up to 120 days; payment plans allowing you to pay your taxes over time; Currently Not Collectible status for those who demonstrate financial hardship; and an Offer in Compromise, wherein the IRS can settle for an amount less than what is owed.

Fortunately, a payment alternative is available to those who qualify and contact the IRS to request it. Moreover, the current interest rate on these plans is a low 3%. Ignoring the taxes you owe is not advised, as the IRS may take more severe measures such as garnishing wages or levying one’s bank account. A federal tax lien could additionally be issued, negatively impacting credit and making it hard to sell a property or get a loan.

Is it Necessary to Pay My Taxes in a Single Payment?

No. If you are unable to pay your taxes on time or in full, you can still work out a solution with the IRS. To begin with, file your return and pay as much as you can. The IRS will then send you an invoice for the remaining amount, charging you with interest and a late payment penalty. If your bill is under $50,000, you can request an installment agreement by filling out the payment agreement form online. You can also file Form 9465 or charge the total to your credit card.

What Occurs When You’re Unable to Pay Your Taxes?

After you’re done with your taxes, you may not be feeling too great if you owe the IRS a considerable amount. You may feel disbelief that such a thing even happened, then frustration as you realize the taxes you have to pay. Questions may arise like, how much time do I have to pay? Or is there a chance I could go to jail? Take a moment to relax and know that you’re fine and jail time isn’t an option here.

Failing to file taxes or attempting to evade the Internal Revenue Service is not the answer; it will only add to fines and penalties. With our help, even the most serious of tax debt can be managed, and we can help you ensure it never happens again.

Steps to Take When Unable to Pay Your Taxes

When you realize you can’t pay your taxes, the first step is to take action. Acknowledge that you owe taxes but don’t have the money to pay them back. Don’t let fear take over or jump to conclusions. Follow these simple steps to address the issue.  

Step 1: Submit your tax return by the regular deadline, even if you’re unable to pay the taxes owed promptly.

It’s essential to enlist the aid of a seasoned tax professional as soon as possible in order to file your taxes. Not only can they identify potential credits and deductions to reduce what you owe the IRS, but every dollar matters when you owe the government.

You may delay filing your taxes, assuming you’ll save money, but the penalties for not filing or filing late could be a lot higher than the penalty for not paying on time. Understand that even if you file your tax return in February or March, the due date doesn’t come until before Tax Day. This gives you two months to gather the funds needed to make your payment.

When considering an extension, bear in mind that it doesn’t provide an extension of the amount due. An extension only affords you more time to submit your tax return. However, if you wait too long to settle the amount due, you’ll be subjected to interest and penalties on unpaid taxes. Don’t forget to make sure you file on time!

Step 2: Settle as much of your tax debt as possible by the due date.

When owing a large amount on taxes, like $15,000 or more, it can be difficult to come up with the necessary funds before the due date. To avoid penalties and interest, consider selling items around your home to come up with the extra money. If you find yourself unemployed, prioritize essential needs such as food, utilities, shelter, and transportation before all else. After you have provided those basic necessities, pay whatever you can afford towards the tax bill.

Step 3: Continue making payments on your tax debt even after filing, and discuss a payment plan with the IRS.

After Tax Day, you’ll have a month or two before the IRS contacts you about the remaining taxes owed. During this period, prioritize paying off the tax debt with every dollar available. If you’re unable to clear the bill by the time the IRS contacts you, apply for a payment plan via the IRS website. 

The IRS offers short-term plans of 120 days or less if the bill is under $100,000, and long-term plans under $50,000 with an associated setup fee. This fee may be waived for those classified as low-income earners. With the right plan and motivation, you can pay off your tax debt in a timely manner.

Step 4: Address the issue to prevent future unmanageable tax bills.

After making a mistake with a miscalculation of income, resulting in owing a few thousand dollars at the end of the year, one should collaborate with a trustworthy tax expert to ensure an unaffordable tax burden is not faced in the future. This could involve setting aside profits from a side business, making quarterly tax payments, or adjusting paycheck withholding. 

The right tax professional will be able to identify the issues and assist with resolving them moving forward. To make this easier and avoid complications in the future, it is beneficial to collect the necessary paperwork from the start. 

Consequences of Not Filing Your Taxes

Failing to file a tax return when you owe taxes is an illegal action with significant consequences. The IRS imposes a Failure to File Penalty amounting to 5% of unpaid taxes for each month the taxes remain overdue, with the penalty maxing out at 25% of the total tax bill after five months of not filing. 

On top of this, the IRS will add interest to the penalty. In extreme cases where a taxpayer continues to neglect to file a return, imprisonment could be enforced; however, the IRS usually seeks alternative solutions to resolve any issues with a taxpayer before bringing on jail time. Thus, it is essential to file your tax return on time to avoid any of these penalties.

Paying Your Taxes Late

When it comes to submitting your taxes, the adage “better late than never” certainly applies. Filing your tax return, even if you cannot afford to pay the full amount, will put you in a more favorable position with the IRS. It’s best not to wait for the IRS to discover your oversight. By filing, you’ll also benefit from reduced penalties and interest charges.

If your finances are in difficulty due to the loss of a loved one or job, you may ask the IRS to classify your due balance as Currently Not Collectible. This delays payment and halts collection efforts, though interest and penalties will still add to the amount owed until it is paid. Additionally, an Offer In Compromise (OIC) may be proposed — this proposes a realistic payment rate to the IRS, ultimately reducing what is owed and allowing debt resolution. The IRS calculates income, expenses, assets, and other considerations to decide if the offer is acceptable.

It’s important to note that the chances of qualifying for an Offer In Compromise are relatively low. OIC approvals are uncommon, and typically, only those in dire financial situations are granted this form of tax relief.

Is it Possible to Face Jail Time for Failing to Pay Taxes?

Though it’s unlikely you would be sent to jail for not paying your taxes, there can be some serious consequences. The IRS can take several enforcement actions against you, including garnishing your wages, levying your bank account, placing a lien on your property, or seizing your assets.

However, if you intentionally concealed significant income sources, lied on your tax returns, or failed to file a return to avoid taxes, you could be charged with tax fraud or tax evasion. You may face three to five years in jail for these offenses, depending on the severity of your actions. Don’t be like infamous gangster Al Capone who served eleven years in prison for tax evasion (the only crime the FBI could successfully charge him with).

5 Alternatives for Individuals Unable to Pay Their Tax Debts

The anticipation of receiving a tax refund can make the process of filing taxes enjoyable. However, if you believe you might owe the IRS money that you cannot afford, initiating the process can be daunting. If you’re delaying filing due to concerns about tax liabilities, it’s essential to know the available tax relief options. Here are five methods to seek assistance with your tax debt:

1. Contribute as much as possible.

Regardless of the amount you owe, it’s essential to either file your taxes on time or request an extension if you cannot meet the deadline. While an extension grants you additional time to file your taxes, it does not extend the deadline for payment; however, neglecting to file an extension can result in severe penalties. 

If you fail to pay your taxes, the IRS will charge interest on the outstanding amount. Although you may not be able to cover the entire tax bill, paying a portion of it will reduce the interest accrued on the remaining balance.

2. Explore the option of an IRS payment plan.

An IRS payment plan, also known as an installment agreement, enables you to settle your tax debt over an extended period. You can apply for a short-term or long-term payment plan based on the amount you owe and your estimated repayment timeframe. 

Be aware that a payment plan will involve interest and penalty charges. Additionally, there may be processing fees for using a debit or credit card and a setup fee. However, the IRS may waive application fees for low-income applicants who meet the eligibility criteria.

3. Submit a request for an Offer In Compromise.

An Offer In Compromise allows you to settle your tax debt for less than the full amount owed. The primary advantage of an OIC is paying less than the actual debt. Additionally, it helps avoid collection calls and letters from the IRS.

Applying for an Offer In Compromise is a lengthy process that requires extensive documentation to demonstrate your inability to pay the tax bill, a $205 application fee, and an initial payment toward your debt. While your application is under review, your payments and fees will be applied to your outstanding balance, which must be paid eventually, even if the IRS agrees to reduce it.

It’s important to note that the IRS rejects most of these applications. If this happens, your initial payment will likely be applied to your balance, and your application fee may be refundable under certain circumstances.

For those who meet the low-income certification requirements, the application fee and initial payment might not be necessary. Additionally, you won’t need to make monthly payments while your offer is being evaluated.

4. Request a Currently Not Collectible status.

For individuals unable to pay their tax bill, requesting a Currently Not Collectible status from the IRS is a potential option. This status temporarily postpones collection efforts until your financial situation improves. However, it is crucial to remember that this designation is temporary, and you will ultimately need to settle your tax debt. Additionally, the IRS can still file a lien against you while you maintain this status.

To secure a Currently Not Collectible status, you must complete a form and provide details about your assets, monthly income, and expenses.

5. Seek advice from a specialist.

In case you are uncertain about your available options, consult a tax professional before engaging with the IRS. Sometimes how to get tax debt relief is best determined by a tax professional after looking over your current circumstances. Request a consultation today.