There’s an old saying that goes, “there are two things you cannot escape in life: death and taxes.” We all do our best to pay our taxes on time, but what happens if we can’t? Not paying holds severe consequences, so if you find yourself in this position, the IRS does have options.
Below we share some steps on how to ease your worries around unpaid taxes.
What are the penalties for not submitting anything?
A big tip is to file your taxes on time regardless of whether you have the money or not – the most significant penalty is if you don’t file your taxes at all. Even if you can’t afford to pay your taxes right away, it is best to pay as much you can since late fees pertain to the total amount you have left to pay. Moreover, filing your taxes and actively planning out your payments can avoid unwanted visits from IRS agents and calls or letters from collection agencies.
There are two categories of penalties the IRS assesses when determining your taxes:
- If you file your taxes late, you will be charged 5% of your unpaid balance every month
- If you don’t file your taxes at all, the penalty is 0.5% of the balance each month
What are the options to pay it off if you know you can’t afford it?
First step: don’t panic. The best thing to do is be proactive and weigh all of your options before you take action. Know the path that best suits your needs and figure out potentially how long it will take you to acquire the funds to pay it off. Timing is everything with the IRS, and it is your job to figure out how to make it work for you.
Second step: check if you are eligible for certain tax deductions and credits. For example, if you have a child under the age of 17 and meet the other criteria, you may be eligible for the Child Tax Credit for an amount of up to $1000. Some other tax credits to look into are the Earned Income Tax Credit and the Dependent Care Expense Credit.
What are the payment plan options?
See if you can apply for a short-term or long-term payment plan with the IRS to extend the payment period, but there are a few conditions to meet before filing for an extension. The most crucial step to even being eligible is to file your taxes on time and be up-to-date on all your past tax returns.
Short-term payment plans consist of an extra 120 days to submit the full payment. There are no additional fees to be wary of when applying, but make sure you consider that interest rates and penalties are still added on top of the remaining balance you owe. This option is only available to those who owe $100,000 or less with interest, penalties and taxes included.
Long-term payment plans give you a maximum of six years to pay the outstanding balance owing $50,000 or less. There is a $31 fee to apply for the payment plan online (versus $149 by phone or mail), in addition to the interest rate on the balance. On the bright side, the late penalty of not paying in full on tax day gets reduced from 0.5% to 0.25% if you decide to use this payment plan.
Whatever payment plan you choose, the key is always to make payments regardless of how long you have to pay. If you stop making payments at any time, the IRS can increase your loan rates by placing a lien on your property.
What if payments aren’t possible?
If making regular payments isn’t feasible, there is an option to use an Offer in Compromise (OIC). An Offer in Compromise is a specified lump-sum payment of your taxes less than the full amount you currently owe—settling the tax debt with the IRS. This is done on a case-by-case basis in accordance with your ability to pay, your income, your expenses, and your asset equity.
To see if you’re eligible, file Form 656 with Form 433-A (OIC) and Form 433-B (OIC), ensure all your tax returns are filed, and pay the $205 application fee with your initial offer payment. If you meet the Low-Income Certification Guidelines, you are not required to pay the application fee.
Need expert advice?
As you can see, it’s not the end of the world if you can’t pay your taxes, but it is essential to make sure that you are proactive about your situation to avoid any repercussions with the IRS. If you are in need of advice on any of these forms or have more questions, contact an expert, and we can help you plan out your finances.