Many Americans approach the tax season not knowing whether they will get a refund or owe money to the Internal Revenue Service (IRS) and/or their state government. In fact, more than half of taxpayers will owe some amount. If that is the case for you, and you find you can’t pay the full amount, follow this advice.
- file anyway
- take advantage of filing with the IRS if necessary
- ask for an extension
- look into an installment plan
- consider an offer in compromise
- run and hide
- shut down lines of communications
- shy away from asking about a penalty exemption
- neglect other possible resources
- forget about an advocate
Often, people realize they’ll owe more than they can pay when they are filling out their tax returns – then panic and don’t file. Mistake! The penalty for failing to file a tax return is 10 times higher than the penalty for failing to pay taxes. For this reason, even those who are unable to pay anything still need to file returns by the April 15 deadline.
It is also possible for the IRS to file on a taxpayer’s behalf using limited information. Because this type of filing often does not include deductions or tax credits, the amount the IRS calculates is likely to be more than what a taxpayer owes. The bottom-line message is still to file the return even if you can’t pay the full amount you owe.
If you still find there is absolutely no way to file by April 15, the IRS might grant a six-month extension. This gives taxpayers until October to file. However, there will still be a monthly failure-to-pay penalty.
For federal taxes, the IRS allows for monthly installments of up to three years if the total tax debt is $10,000 or less (not counting interest and penalties). There is a one-time fee (about $100) to initiate this plan, but the price drops by half if you allow the IRS to automatically deduct payments from a bank account each month. Many states also allow taxpayers to pay in monthly installments.
If paying the federal tax bill is highly improbable, and the amount is $10,000 or more, taxpayers may be able to file (for a fee) for an Offer in Compromise and settle for far less than what is owed. The IRS has strict criteria for accepting a compromise. A tax resolution debt specialist is essential, if not mandatory, in negotiating this process.
Even if it is not the full amount, paying something toward a tax bill will decrease the amount of interest accrued on the unpaid balance. While a partial payment is better than no payment, remember that the IRS will still charge a monthly failure-to-pay penalty.
It is in taxpayers’ interest to keep those lines open with the IRS and to be proactive about working out a payment plan.
If you do file late, occasionally, the IRS will exempt taxpayers from penalties if there is reasonable cause for the delay. Some reasonable causes include death in the family, a natural disaster like a major tornado, divorce, active military duty or illness. To ask for this exemption, send a certified letter to the address on a past-due notice received from the IRS.
In a worst-case scenario, tax debt can be paid with a low-interest credit card, a home equity line of credit or a loan from a family member. While not strongly recommended, these alternatives may be the least expensive ones in the long run because they help the taxpayer avoid the IRS penalty fees (but not interest).
Taxpayers who are unable to resolve tax problems on their own, or who have tax problems that are causing financial difficulties for them, their family or their business, can contact the IRS’s free Taxpayer Advocate Service. Each state has a local taxpayer advocate. The national hotline number is 877-777-4778.
Whether working on one’s own with the IRS, or with the help of a tax debt resolution expert, the effort is worth it. Avoiding filing or paying taxes will only lead to more debt and greater stress.