Many people are faced with an ugly surprise at tax time—a tax bill that is hundreds or even thousands of dollars more than expected. For most workers, their employers are required to withhold the correct amount of taxes each pay period, and self-employed workers typically pay estimated taxes every quarter directly to the Internal Revenue Service (IRS). There should never be surprises when filing a tax return.
However, many taxpayers that owe taxes find themselves asking, “What if you cannot pay your taxes?” Options are available for people who owe taxes to the IRS and do not have the means to pay it. A qualified tax attorney at Damiens Law can help. Consider calling (662) 442-4423 in Mississippi or (901) 499-4466 in Tennessee to schedule a consultation to get answers to some of your tax questions.
File a tax return, even if you cannot pay
The IRS requires that all tax returns are filed by the typical deadline of April 15. Some people make the mistake of believing that they do not have to file a tax return until they are able to pay the tax bill. However, the IRS considers not filing a tax return to avoid paying taxes to be tax evasion, which is a crime. At minimum, the agency will assess a late filing fee, which can be up to ten times more than the fee for not paying taxes due on time. If a person is found guilty of tax evasion, however, he or she can face up to five years in jail.
It is important to note that the deadline to pay taxes is not the date that the return is filed. Tax payments are not due until the filing deadline of April 15. Therefore, filers who submit their tax returns in February or March still have a few weeks to pay the IRS. Some individuals may file for a tax extension that will give them until the middle of July to file their tax returns. However, an extension for filing does not delay the date that the payment is due, and an estimated tax must be paid by that April deadline to avoid penalties.
Make a partial payment by the deadline
Unpaid taxes accrue interest, so tax filers who owe the IRS will end up paying more than the initial tax bill after interest is added on. Tax filers who wonder what if you cannot pay your taxes must remember that not paying taxes that are owed under the law is not an option. The government agency may seize assets or garnish paychecks to satisfy the liability. In extreme cases, some people can end up with heavy fines or even jail time for non-payment.
Filers who owe the IRS may opt to sell personal possessions, such as jewelry or sports equipment, to pay the tax bill. Others may opt to use a credit card to pay their taxes. Although not everyone has these options, the more money a person can put towards his or her tax bill, reducing the principal amount owed, the less interest will accumulate.
Penalties for nonpayment of taxes owed
According to the IRS, not paying taxes owed under the law leaves the filer subject to certain fines and interest charges based on the amount owed. These can accumulate over time. However, making a payment of any amount towards the outstanding tax bill demonstrates to the IRS that the individual is making a reasonable faith effort to pay the amount due. To help taxpayers avoid these penalties, the IRS offers options to make arrangements for paying outstanding tax bills.
The IRS has the right to seize assets from your bank account or garnish paychecks from anyone who avoids paying their taxes. The government agency will use enforcement measures to collect the liability and may even put a lien on any property owned by the taxpayer. Often as a last resort, the IRS can also levy bank accounts, which means simply taking money out of the taxpayer’s account to cover the liability.
Payment plan options offered by the IRS
If a taxpayer cannot make full payment after filing a tax return, he or she may contact the IRS to request a payment plan for their tax liability. The IRS website offers a portal for individuals or couples to set up payment arrangements, although they will still pay interest on the outstanding balance. According to the IRS, taxpayers are expected to file their returns by the due date and pay as much of the amount owed as possible. If there is still an outstanding balance, the IRS may allow taxpayers one of the following options:
- Installment Agreement—paying a set amount each month
- Offer in Compromise—the taxpayer settles with the IRS for less than the initial amount owed
- Application for Extension—if approved, the IRS extends the time a taxpayer is allowed to pay the tax debt due to hardship
Taxpayers who ask the IRS to consider an installment payment plan should attach an Installment Agreement Request Form 9465 to the top of the tax return. The IRS states that the approval process is streamlined for people who owe less than $25,000 and who can pay the debt off within five years. On the form, the taxpayer will propose a monthly amount to send to the IRS and a monthly payment due date.
The installment arrangement fee is $43. Interest on the outstanding balance is 0.5 percent, but it drops to 0.25 percent after the IRS approves the installment plan. The late filing penalty is 5 percent of the balance due for tax returns that were not filed on time. The IRS encourages taxpayers who owe to pay as much of the balance as they can when filing their tax returns to reduce the financial penalties.
Offer in compromise
The other option that the IRS offers for people who cannot pay their tax liability is an Offer in Compromise. People who are in financial hardship and cannot afford a payment plan may ask the IRS to settle the debt for less than what is owed. To apply, the IRS requires the filer to send Form 656, Offer in Compromise, and Fr 433A, Collection Information Statement. The forms allow the IRS to review the applicant’s finances to determine whether he or she is truly unable to pay the bill.
Application for extension
The IRS offers another option for those experiencing undue hardship. Filers can apply for a payment extension using Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship. This is considered a true hardship extension, and the IRS will ask for a statement of the applicant’s current assets and liabilities, as well as an itemized statement of all monies received and spent in the last three months. Payment extensions are rarely granted and typically not granted in cases where the individual did not anticipate owing taxes.
An experienced tax attorney at Damiens Law can help taxpayers understand their options with the IRS and represent clients in negotiations with the IRS.
Other options for settling unexpected tax liability
Some filers may opt to use credit cards to pay their taxes. While this takes care of the obligation to the government, going into debt with a credit card company may not be the wisest financial option. The tax liability still needs to be paid, and the interest rate on nearly all credit cards is much more than the interest rate that the IRS charges on its payment plans.
Another method to repay the IRS is to borrow the amount necessary through a personal loan or a debt consolidation loan from the bank. Again, while taking out a loan to pay you tax liability will discharge the tax liability, the interest rates on these types of loans will likely be higher than the interest rate of an IRS payment plan.
Homeowners with equity may be eligible for a home equity line of credit, which has a lower interest rate than personal loans and credit cards. However, defaulting on the home equity loan may have the same impact as defaulting on a home mortgage—homeowners could lose their house. Filers with emergency funds may choose instead to use part of that money to pay the IRS. Borrowing money to pay the IRS may, however, be an option if the taxpayer’s payment plan is rejected or if the taxpayer does not qualify for an Offer in Compromise.
Budget for interest, late fees, and penalties
Any tax amount that is paid late to the IRS will have penalties and interest assessed. The more a taxpayer can pay towards the balance when filing, the lower the amount of interest will be for them to pay in the future. When budgeting for a proposed tax payment plan, include interest and late fees in the calculation.
Taxpayers are encouraged to pay as much as they can when filing an annual return. They can then make payments using Form 1040-V until the IRS approves the installment plan or the Offer in Compromise. Taxpayers are expected to make payments toward their tax bills while waiting for the IRS to respond.
A tax lawyer can help if you cannot pay your taxes
A tax lawyer or tax professional can help people better understand their options and their rights if they are struggling with the question, “What if you cannot pay your taxes?” A lawyer may be able to help a taxpayer avoid certain enforcement measures or jail time. While every situation is different, a tax professional who understands the tax laws, consequences of a federal tax lien and penalties can help people better protect themselves and their finances.
Consider calling Damiens Law at (601) 957-9672 to schedule a consultation to learn more about your legal rights.