What if you completed your tax return and find that you owe the IRS a large sum, but you can’t afford to pay it?

What If You Can’t Afford to Pay the Taxes You Owe?

  • February 14, 2020

Maybe you've just finished preparing your tax return and you find that you owe the IRS a large sum, but you can’t afford to pay it. Are you going to jail? Probably not. The realization that you can’t afford to pay your taxes can make you feel uneasy, but don’t worry. There are some things you can do to remedy the situation and avoid landing in hot water with the IRS.

First and foremost: DON'T PANIC! There are ways to solve things and make things right. The key is to not avoid the problem. Not filing or hiding from the IRS won't solve anything and will make things worse. Grab the bull by the horns, deal with things logically, and then make sure you don't find yourself in the same position again. Sound good? Okay, let's get started...

1. File Your Return on Time, Even if You Can't Afford to Pay What You Owe on Time.

Even if you don’t have enough money to pay the taxes due, you still need to send in your return by the filing deadline. The IRS assesses two types of tax penalties: one for filing late and one for failing to pay. The penalty for not filing your taxes can be much, much worse than the penalty for not paying (note the difference: filing vs. paying), so make sure you file your return on time! 

For the 2019 tax year, the penalty for filing late is 5% of your taxes owed for each month your return is late, up to a maximum of 25%. The late payment penalty, by comparison, is just 0.5% of the unpaid taxes due. Even if you can't pay your tax bill in full on time, you'll still accrue a much lower penalty than you would by waiting to file your return – or not filing at all. So make sure to get your return in by the filing deadline if not sooner.

Another key piece of advice is to pay as much of your taxes owed as you can when you file. Even if you can't pay in full, paying something towards your balance due can reduce the amount of interest and penalties you'll face later.

2. Review Your Options for Paying.

Whether you owe $500 or $50,000, the first thing you should do is try to find possible sources to obtain the money you need to pay.

You may look into accessing the equity in your home, using a credit card to pay your taxes owed, getting a personal loan, diving into your savings, borrowing from friends and family, or even cashing out paid time off at work. A more extreme option – consider this only as a last resort – is to pull money out of your IRA or other retirement savings. Note: this can trigger its own tax penalties, so steer clear of this approach if at all possible.

If you're looking at taking out a loan or using a credit card to pay your tax bill, remember to factor in the interest rate and fees. If you can repay a loan or credit card payment fairly quickly, or use a credit card with a 0% APR, the cost may be minimal. But if you owe a larger tax bill, the interest will likely add up very quickly. Additionally, the IRS charges processing fees for paying income taxes with a credit card, which will increase your total cost.

3. Plan on Paying the IRS As Soon As Possible to Avoid Penalties, Fees and Any Actions.

Don't lose sight of your timeline, Of course, it's always best to pay the taxes you owe in full and on time, but there are situations when all you may need to do upfront is to file your return and accept the late payment penalty. As long as you file your taxes on time, the IRS will send you a letter in the mail stating how much you owe plus any additional interest or penalties are due.

While this will buy you a little time, the downside is that your tax bill will be lingering over your head and what you owe will be accruing penalties and interest until you pay. The upside, however, is that the interest you pay will be relatively low compared to financing the money with another source.

This definitely should not be a long-term solution, and your goal should be to pay the IRS as soon as possible, since the longer you wait the more the penalties and interest can add up – and it can be steep, and, if you don't respond to them, the IRS may take further action. If you wait too long to pay, the IRS may decide to place a lien against your property or garnish your wages or bank account.

4. An Installment Agreement Might be a Good Option.

The IRS (government) would rather get their money over a period of time as versus not at all, so they do have an installment plan available for when you can’t pay in full. To request an installment plan, you should use Form 9465. You can set this plan up to do a direct debit from a bank account to make the process easier, which the IRS prefers.

A short-term installment agreement can be established if you think you can pay your tax bill in full in 120 days or less; a long-term plan is also available if you need more than 120 days to pay. Note that there is a fee to apply for an installment agreement.

You can apply online for a short-term payment plan if you owe less than $100,000 in combined tax, penalties, and interest. Long-term plans are available if you owe $50,000 or less. If your tax owed is higher, you'll have to mail in your Form 9465 to apply. The IRS prefers that payments are made via direct debit from your bank account. Penalties and interest will continue to accrue until your balance is paid in full.

5. Offer In Compromise is Another Option.

If you can’t find the money and you can’t get an installment plan, there's another option available: an Offer in Compromise. This is only for extreme circumstances.

If you request an offer in compromise with the IRS, you can offer to make either a lump-sum payment or fixed payments over a short period of time. In the course of this, the IRS agrees to accept less than the full amount owed to satisfy your tax obligation. This process requires you to submit a complete personal financial statement and an application fee of $150 in addition to Form 656.

Offers in Compromise are evaluated on a case-by-case basis and you may or may not be approved. If the IRS determines from the information you've provided that you're unable to pay the amount in full, the offer may be accepted. Once it's accepted, you must agree to pay your taxes in full and on time for a period of five years after the offer is established. You can read more about Offer In Compromise on my website here.

Know All Your Options and Evaluate Them Carefully.

Paying the taxes you owe is a very important responsibility, so it's vital to explore all of your options and not panic. Most importantly, file your return on time to avoid the late filing penalty. Then take time to consider how realistic it is for you to pay your taxes and what avenues are available. While I've provided tips and options available to you, this isn’t typically a situation to handle by yourself. You would likely do best working with a qualified tax expert to walk you through this process and to determine the very best course of action for your situation.

And after all is said and done, it's important to work with your tax expert to make sure you’re not stuck with taxes you can’t afford again. That's what my Tax Problem Solver Team and I are focused on. We're here create a Game Plan to help you through your situation and achieve the best outcome, and to give you structure to not repeat the mistakes that brought you to this point. You can email me at Larry@TaxProblemSolver.com or phone my office at 855-BEAT IRS (855-232-5752). Let's get you through this tax problem so you can sleep again at night.

About the Author Larry Heinkel J.D. LL.M

Larry Heinkel is a tax and bankruptcy attorney with more than 36 years experience helping businesses and individuals, solve their state and federal tax problems. Mr. Heinkel has been extremely successful in representing his clients before IRS and DOR, and is known throughout Florida as an expert in tax problem resolution.

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