I know firsthand how stressful it can be to owe taxes, especially when you’re worried about not being able to pay on time. The good news is, in most cases, you won’t be heading to prison for tax evasion. However, you might have to deal with interest or penalties, which can still feel overwhelming.
Even if you find yourself unable to pay by tax day, it’s crucial to at least file your return or request a six-month extension. This simple step can save you from additional headaches down the road. Once you’ve done that, take a moment to review your payment options so you can figure out the best way to settle your debt with the IRS.In this article, I’ll walk you through the consequences of not filing or paying on time. More importantly, I’ll share practical advice on what steps you can take if you find yourself in a situation where you owe the IRS. Let’s tackle this together and take the stress out of tax season.
What to Expect When You Owe the IRS but Don’t File or Pay
Have you ever wondered if you really need to file your tax return when you can’t pay your tax bill? Let me tell you, it’s crucial. Filing your return or requesting an extension is essential to avoid the failure-to-file penalty. This penalty is a percentage of your unpaid balance for each month or part of a month that your return is late, up to a maximum percentage of the unpaid tax. The penalty is even steeper if the failure to file is due to fraud, and for returns filed more than 60 days late, there’s a minimum penalty that can be quite substantial.
No matter if you owe back taxes or current taxes, failing to pay can lead to significant penalties and interest accruals over time. The failure-to-pay penalty starts at a lower percentage of your balance due each month and is capped at a certain percentage of the back taxes you owe. Additionally, the interest rate for underpayment of taxes can change quarterly, making it even more important to address your tax obligations promptly.
Steps to Take If You Owe the IRS
Understanding your options is key to figuring out what to do if you owe the IRS. Having been in this situation myself, I know how important it is to come up with a solid plan. Here are some common solutions that can help you manage your tax debt if you find yourself unable to pay.
Seek a hardship extension to settle your taxes.
If you’re facing financial hardship and owe the IRS, there are options available to help you manage your situation. The IRS offers solutions such as currently not collectible status and the offer in compromise. If you need an extension due to hardship, you’ll need to demonstrate that paying your taxes would cause significant financial strain according to IRS financial standards.
One of the best parts about applying for a hardship extension is that there are no costs involved. You won’t face penalties, but keep in mind that interest will be calculated at the short-term federal rate plus a certain percentage, which may change each quarter. This can provide some breathing room as you sort out your finances.
To get started, you need to file IRS Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship. Make sure to include a detailed statement of your assets and liabilities to support your case. This proactive step can help you avoid further financial stress and give you more time to pay what you owe.
Consider getting a personal loan.
Consider reaching out to a personal contact, such as a friend or family member, for a loan. The fees and costs will vary widely depending on who you ask, making this potentially one of the more affordable options. However, it’s important to use your best judgment in these situations.
Borrowing from someone close to you can help ease the financial burden without the high-interest rates typically associated with other loans. Just be sure to have a clear agreement in place to avoid any misunderstandings or strain on your relationship.
Arrange an installment plan with the IRS.
If you’re struggling to pay your tax bill, setting up an IRS payment plan, also known as an installment agreement, might be a good option. The type of agreement you qualify for will depend on your specific situation, including the amount you owe and your ability to pay off the balance. However, if you can pay the balance relatively soon, it’s generally better not to set up an installment agreement.
When applying for an online payment agreement, there is a payment required, with lower fees for low-income taxpayers. To apply for a low-income fee, you’ll need to submit Form 13844. For installment agreements of $50,000 or less, you don’t need to submit a financial statement, but completing an online payment agreement or Form 9465 is necessary. Consulting with an expert can help you evaluate your situation and find the best solution.
One advantage of setting up an installment agreement is that the penalty on your unpaid balance is reduced to a smaller percentage per month until the balance is fully paid. However, interest is still charged at the short-term federal rate plus a certain percentage, which may change quarterly. Keep in mind that the IRS can void your agreement if you miss payments. For balances over $50,000, you’ll need to complete Form 433-A or Form 433-F and might consider payroll deductions using Form 2159.
Ask for a short-term extension to pay the full amount.
The IRS offers taxpayers the option to pay their full tax balance within a specified short-term period. This can be a great relief if you need a bit of extra time to gather the necessary funds without entering into a long-term payment plan.
There is no fee to request this extension, but keep in mind that there will be a penalty of a certain percentage per month on the unpaid balance. To take action, you can complete an online payment agreement, call the IRS at 808-800-4805, or consult with an expert from Tax Resolution Services of Hawaii to help manage the process.
This short-term extension is particularly convenient for those who need just a bit more time to pay their tax bill in full. While you will avoid the installment payment application fee, you will still be responsible for late-payment penalties and interest, which is charged at the short-term federal rate plus an additional percentage. This option can save you from larger fees associated with long-term installment plans while giving you the time you need to settle your tax debt.
Pay using a debit or credit card.
Various service providers offer flexible payment options that can make settling your tax bill more convenient. Fees vary but generally range from a small flat fee for debit card payments to a percentage of the tax balance due for credit card payments. To get started, check with the IRS for a list of approved service providers or consult with Tax Resolution Services of Hawaii. Paying your taxes this way can give you greater control and flexibility, and you might even earn points, miles, or other rewards from your credit card. However, be cautious, as higher credit card balances can negatively impact your credit score, and using credit for tax payments may not be suitable if you already have unmanageable credit card debt.
Withdraw from your 401(k).
If your 401(k) plan permits this type of loan, you can generally borrow up to a specific percentage of your account balance, with a maximum limit of $50,000. You’ll need to repay the borrowed amount within five years, making it a relatively short-term solution.
There might be a minimal fee involved, and the plan will also charge interest on the loan. To understand the exact terms and conditions, it’s essential to check with your plan administrator for detailed information.
A 401(k) loan can provide a quick and low-cost way to access cash for paying current or back taxes. However, it’s crucial to consider the potential drawbacks. Failing to repay the loan on time will result in it being treated as a taxable distribution, which can negatively affect your retirement savings. Additionally, if you leave your job or if your plan terminates, the loan balance becomes due immediately. For those under age 60, this taxable distribution is also subject to an early distribution penalty, adding to the financial burden.
Conclusion
At Tax Resolution Services of Hawaii, our experienced tax professionals are here to help you determine the best steps to take if you owe taxes but can’t pay. With the guidance of a trusted IRS expert, you can navigate your options and find a solution that works for you.
