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What to do if you can't pay the taxes that you owe

Valrie Chambers Associate Professor of Taxation and Accounting, M.E. Rinker Institute of Tax and Accountancy Stetson University
What to do if you can't pay the taxes that you owe

As the tax deadline approaches, what should you do if you think that you can’t pay taxes that might be due? That’s obviously not a good situation to be in, but you can minimize the damage by doing a few key things.


Do

Do file your taxes anyway

There is a penalty for failing to pay your taxes in a timely manner, and there is also a penalty for failing to file your tax return in a timely manner. You can avoid the second penalty by filing on time, even if you can’t pay your taxes due. To file your taxes, you have to prepare your taxes, and then you will know exactly how much tax is due - it may not be as bad as you think!

Do consider an installment agreement

If you are current through last year’s taxes, most past due taxes can be paid by requesting an installment agreement on Form 9465, Installment Agreement Request. This one-page form (available at irs.gov) lets you, within reason, set the amount and monthly date of your installment payments.

Do consider an Offer in Compromise for larger amounts

If the amount that you owe is very large relative to your ability to pay, an offer in compromise may be an alternative. This is where you, in essence, agree to pay all your discretionary assets and income and they agree to lower your tax bill. It is harder to have these approved, but may be worthwhile depending on your current situation. See irs.gov/taxtopics/tc204.html.

Do ask for a late payment abatement

If this is the first time that you are late in paying, or if you are paying late as a result of the health care premium credit reconciliation, ask for a one-time late payment abatement. Generally you must file on time and otherwise be current in your tax obligations for this to be approved.

Do consider adjusting your W-4 or making estimated tax payments (Form 1040ES)

It’s bad enough to be in this situation once - you don’t want this problem to be ongoing. Consider adjusting your W-4 or making estimated tax payments (Form 1040ES) to protect yourself from owing too much again next year.


Don't

Do not ignore the problem

Ignoring your problem will not go away, and it will only get worse. Every year you don’t pay your taxes, whatever the amount is will be added to next year’s taxes. Failing to pay your taxes can also result in a tax fraud charge, which will only result in you having to pay more money in fines.

Do not be afraid to ask for help

Consider hiring a CPA to help you with your payment arrangements and to act as a buffer against IRS correspondence. There may also be a low-income tax clinic in your area - if you qualify, there help is usually free or at greatly reduced rates.

Do not over react

You’re not the first person in this situation and you won’t be the last. This is emotionally rough, but it’s also a problem that can be overcome, and is much less serious than, say, serious health problems.

Do not borrow from credit cards

Don’t take out high-interest loans to pay taxes before you’ve requested and been denied an installment agreement. The IRS will charge penalties and interest, which combined total about 13%/year. Paying a higher interest rate than that may dig a deeper financial hole than the one you are already in. Don’t borrow against pensions, which if left unpaid will cause future tax problems, because the unpaid portion will be taxed at ordinary income tax rates and, if you’re under age 59 ½ are subject to an additional 10% penalty.

Do not respond to emails from the IRS

The IRS will not send you a bill or official notice by email. Generally if you get an email that claims to be from the IRS, it is initiated by tax scammers after your bank account, credit or tax refund.


Summary
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Being unable to pay taxes when they come due is unsettling, but it is a problem that can be overcome. File your taxes anyway and address the payment problem quickly, perhaps by requesting an installment agreement. Fix this and move on - there are more important things in life!


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Valrie ChambersAssociate Professor of Taxation and Accounting, M.E. Rinker Institute of Tax and Accountancy

Dr. Chambers is an Associate Professor of Accounting at Stetson University in Celebration, FL, USA. Prior to receiving a Ph.D. from University of Houston concentrating in taxation in 2000, she had over a decade of public accounting experience as...

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