What to Do if You Can’t Pay Your Taxes

can't pay your taxesWhatever you do make sure you file your return on time. The penalties for failing to file your tax return on time are stiff. You will be charged 5% on the amount you owe each month up to a maximum of 25% of the tax owed after 5 months. It is much better to file your return on time, even if you don’t have the cash to pay, to avoid having to pay this penalty. Don't have the cash? Here are several options:




Options to Pay Your Taxes if You Don't Have the Cash



Pay With Credit or Debit Card


If you owe $1000 or less it will most likely make sense to pay your tax bill with a credit or debit card.   The interest and fees charged by your bank or credit card company will be less than the interest and penalties charged by the IRS. If you owe more than $1000 you will need to take a look at your ability to pay down this credit card debt in a reasonable period of time before making this decision.  You must use one of the approved processing companies and there is a fee for this service.



Get a Tax Extension 

The IRS will give you 6 extra months to file your return if you request a tax extension. To do so, submit Form 4868 by April 15th. A tax extension will help you avoid late filing penalties if you can’t file your return on time. You will still need to pay your tax liability by the original deadline, or interest and late payment penalties will apply. However, you are not required to pay your taxes in order to get an extension. Furthermore, if you pay 90% of your tax liability by April 15, the IRS will waive the late payment penalty.



Installment Agreement


If you are not able to pay the entire tax liability when you file your return, you may request an installment agreement by attaching Form 9465 to the front of your return. If you owe less than $25,000 in taxes, penalties and interest, you may request to pay your tax liability over 60 months. If you owe more than $25,000 in taxes, penalties and interest, you will need to provide financial statements and negotiate directly with the IRS. If you pay through a direct debit from your bank account the $120 installment agreement fee is reduced to $52.



Offer in Compromise


An offer in compromise is an agreement between the IRS and the taxpayer that effectively reduces the tax amount owed. The IRS will generally approve an OIC if the offer represents the most the IRS is likely to collect within a reasonable amount of time. The IRS's “Fresh Start” initiative to offer more flexible terms to the OIC program includes the following:


  • Revising the calculation of taxpayer's future income
  • Taxpayers are allowed to repay student loans
  • Taxpayers are allowed to pay delinquent state and local taxes
  • Allowable Living Expense amount and categories expanded

 The IRS will look at your ability to pay, sources of income, expenses, and any equity you may have in assets in determining whether or not to accept your OIC.  Payment options include lump sum or periodic payment. With a lump sum you must submit an initial payment of 20% of the OIC amount.


Undue Hardship Extension


To get an undue hardship extension you will need to convince the IRS that paying the full tax liability you owe will create an “undue hardship.”  In other words, you will have to prove that you will have to sell assets at a “sacrificial loss” in order to pay your tax bill.  You will also be required to provide security for your tax-debt in the form of a deed of trust, bond, notice of lien, or personal guarantee. During the hardship extension, the IRS won't charge penalties however, you will have to pay interest on the tax that you owe.

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