There’s no need to panic if you can’t pay your tax bill; Tax Day is fast approaching. You’ve just finished preparing your tax return and notice that you owe the IRS a hefty sum, but you can’t afford to pay it. Are you going to jail? Maybe not. The realization that you can’t afford to pay your taxes can make you feel uneasy—but don’t worry, you have options.
The most important advice I can offer you is this: Don’t avoid the problem! You can’t solve it by not filing or by hiding from the IRS. You must pay any taxes owed. Face the issue head-on so you can get the mess cleaned up, then make sure you’re never in that position again.
The good news is that it can be done if you know where to start. Here are some things you can do to remedy the Internal Revenue Service (IRS) situation.
File Your Tax on Time
Whatever happens, if you prepare your taxes and discover you owe a lot and don’t have enough money to pay the taxes due, do not become discouraged and not file. So whether you expect to make a monthly installment plan or an offer in compromise, or you need some time to think about what you want to do, file. The IRS typically assesses two types of tax penalties: filing late and failing to pay.
Therefore, even if you know you can’t afford to pay your tax bill, you should still make every effort to get your returns filed on-time.
When you file, pay as much of your taxes owed as you can afford. The late payment penalty is assessed as a percentage of the total bill owed, so anything you can pay while filing will reduce the cost of your penalties down the road.
Request for an Installment Agreement
The government, just like anyone else, would rather get the money over a period of time as opposed to not at all, so the IRS offers an installment plan when you can’t afford to pay it all at once.
If you’re behind on your taxes but feel you can catch up with them eventually, an installment agreement is probably your most appealing option. After you file your return, go to irs.gov and fill out an online payment agreement application, or you can also mail in your taxes and include Form 9465. Hopefully, you haven’t neglected to file in previous years, though.
To be eligible for any installment payment agreement with the IRS, you must have filed all required tax returns, so if you haven’t filed any past returns, that should be done first.
Something else to consider, especially if you’re self-employed and you need to make quarterly tax payments: While you’re paying your back taxes in an installment plan, you still need to make payments on the current year, so you don’t fall behind.
In fact, if you make your installment payment too high and fail to budget enough so you can pay taxes on the current year, you might start a vicious cycle of owing the IRS indefinitely.
Review Your Options for Paying
Whether you owe $100 or $5,000, the first thing you should do is try to find possible sources to obtain the money you need to pay.
For example, you may consider using a credit card to pay your taxes, digging into your savings, getting a personal loan, borrowing from friends and family, or cashing out paid time off at work.
Carefully consider the potential downsides before using retirement savings, a loan, or a credit card to pay off a tax debt.
If you’re considering a loan or credit card to pay your tax bill, remember to weigh the interest rate and fees in the balance. If you can repay a loan or credit card fairly quickly, the cost may be minimal. However, if you owe a larger tax bill, the interest can add up very quickly.
Request an Offer in Compromise
If you can’t find the money and you can’t get an installment plan, there’s one final option available: an Offer in compromise.
This is an approach the IRS recommends if a taxpayer cannot pay what they owe. In a nutshell, you make an offer to the IRS, and if they accept it, that’s what you pay. An offer in compromise allows you to settle your tax debt for less than the full amount you owe.
If you request an offer in compromise, you can offer to make either a lump-sum payment or fixed payments over a short period of time. In exchange for the expedited payment plan, the IRS agrees to accept less than the full amount owed to satisfy your tax obligation.
There are no guarantees that you’ll be approved. If the IRS determines from the information (income, expenses & asset equity) you’ve provided that you’re unable to pay the full amount, the offer may be accepted.
Evaluate Your Options Carefully
Paying the taxes you owe is very important, so you must explore all of your options and see which is best for your situation at the time. Above all, file your return by the deadline to avoid the late filing penalty. Then, take the time to consider how realistic it is for you to pay your taxes and what avenues are available.