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.