Can't Pay Your Income Taxes? Here Are Your Options
By Matt Bell
If it looks like it'll be difficult to pay all the federal income taxes you owe, here are your options, along with some key facts you need to know. (It's a different question if you don't have enough to pay your taxes.)
There are two distinct aspects involved in paying taxes: filing your return and paying it. Not filing your return on time and not paying what you owe come with different ramifications. It may surprise you to know that if you don't file your return on time, even if you can't pay all that you owe by April 15, you'll face the biggest penalty.
Failing to file on time and not paying all that you owe by the due date will cost you a monthly penalty of 5 percent of your tax bill plus interest. However, if you do file on time, or request a filing extension by midnight on April 15, the penalty drops to half of 1 percent plus interest. So, at the very least, file your return or request an extension by April 15. Paying as much as you can by the filing deadline will lower your costs as well, since the late payment penalty is based on a percentage of what you haven't paid.
A Variety of Options
Next, you'll have to come to an agreement on how to pay the rest of what you owe. Don't let this slide. Uncle Sam may look friendly, but he has some collection tactics available to him that most other creditors don't. This could be garnishing your wages, taking money from your bank accounts, or slapping a lien on your property. Don't let things get to that point. Instead, explore the following options:
- Short-term extension: If you think you can pay all of what you owe within 120 days of April 15, apply for an online payment agreement. You can also call the IRS at 800-829-1040 for more information. There is no up-front fee for a short-term payment extension. However, a late-pay penalty (half of 1 percent of the balance owed per month) and interest will be charged. Still, that should amount to less than what you'd be charged with a longer-term payment agreement.
- Long-term extension: If you can't pay what you owe within 120 days, you may be eligible to pay your tax bill in monthly installments over the course of up to 72 months. There is a fee of $120 to establish an installment agreement, or $52 if you agree to have your payments automatically deducted from your bank account. While you'll still have to pay interest, if you filed your return on time, the monthly late-pay penalty will be half of 1 percent of what you owe. If you owe the IRS $50,000 or less (including penalties and interest), you should be able to set up the online payment agreement. If you owe more than $50,000, you'll need to complete Form 9465 and supply the IRS with a Collection Information Statement (Form 433-F).
- Temporary delay: If your circumstances are such that you can't pay any of what you owe, and you're not sure when you'll be able to, the IRS may temporarily delay collection until your financial condition improves. However, your debt will grow because penalties and interest will accrue until you come up with the full amount. During the temporary delay, the IRS will continue to review your ability to pay. The government may also place a lien on real estate or other property you own. Contact the IRS at 1-800-829-1040 for more information about requesting a temporary delay.
- Offer in compromise: If you can't afford an installment agreement, you could offer to settle your tax debt in one lump sum totaling less than what you owe. Whether you'll qualify depends, in part, on your income, expenses, assets and the IRS' assessment of your ability to pay. Be forewarned: Relatively few offers in compromise are accepted. There is also a non-refundable $186 application fee, and most applicants have to make an up-front, non-refundable partial payment when they apply. So, make sure you feel confident about meeting the requirements. You'll need to demonstrate that situation is such that you will never be able to pay back everything you owe. Details are in the IRS' Offer in Compromise booklet.
If you are having a difficult time resolving an IRS tax dispute, contact the IRS Taxpayer Advocate Service. This is an independent organization within the IRS designed to provide free help to people whose tax issues are causing financial difficulty.
You may be tempted to turn to a private company for help in settling your tax debt for less than you owe through an offer in compromise, but beware. Such companies often charge steep up-front fees, and there are some unscrupulous players in this field.
For more guidance on what to do if you can't pay your tax bill, read What-Ifs for Struggling Taxpayers on the IRS web site.