8 steps to take if you can’t pay your taxes

8 steps to take if you can’t pay your taxes

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By Andrew Housser

The federal income tax filing deadline is just around the corner, on April 18 this year. Millions of U.S. residents are scrambling to complete their tax paperwork – and for some, the bottom line will be bad news. Moreover, at least 20 percent of people will owe taxes.

1. File anyway. Whether you can pay what you owe, do file your return by April 18. The penalty for failing to file a return or an extension is 5 percent of your owed taxes per month. That is 10 times the penalty for failure to pay, which is 0.5 percent per month, plus 3 percent interest on the outstanding taxes that are owed. So a $5,000 tax bill on a return that was filed on time, but paid three months late, would result in a $75 late-payment penalty plus interest. That same tax bill – with an unfiled return – would result in a $750 penalty plus interest. The difference is a total of $525 additional vs. $1,200 additional fees and interest.

2. Ask for an extension. If you absolutely cannot file by April 18, you can request a six-month extension. You still will owe a monthly failure-to-pay penalty. Occasionally, however, the IRS exempts taxpayers from penalties for reasonable cause. Some reasonable causes include death in the family, natural disaster, divorce, active military duty or severe illness. To ask for this exemption, send a certified letter to the address on an IRS past-due notice.  

3. Take responsibility. Even if you owe taxes because of a mistake made by a tax preparer, you as the tax filer are ultimately responsible for your return’s accuracy. Many CPAs will pay for penalties and interest that are because of their error, but the taxpayer still is responsible for taxes owed. Check with your CPA about his or her policies in this case. 

4. Use your resources. You may be able to pay tax debt with a personal loan, such as a low-interest loan from an online lender. You also could use a low-interest credit card, a home equity line of credit or a loan from a family member. These solutions can save money in the long run, because they help you to avoid the non-payment penalty. You still will have to pay interest on the loan. However, avoid going into other debt that you will be unable to repay. For instance, borrowing against your home would put your home at risk if you could not pay back the loan. 

5. Make monthly payments. Taxpayers who owe up to $50,000 can pay in monthly installments. To do so, attach Form 9465 (Installment Agreement Request) to your tax return. Alternatively, complete an Online Payment Agreement application. Setting up the agreement costs $120, or $52 if you sign up for direct withdrawal from a bank account. You must propose a monthly payment amount and due date. You will still pay monthly interest and late payment penalties. Many states also allow taxpayers to pay in installments. 

6. File an offer in compromise. If it is unlikely that you can ever pay your federal tax bill, you may be able to file  for an Offer in Compromise and settle for far less than what is owed. Not surprisingly, the IRS has strict criteria for accepting a compromise. You may need help from an attorney or CPA.

7. Get an advocate. The IRS provides free assistance for some taxpayers who have tax problems that they have not been able to resolve. Contact the IRS’s free Taxpayer Advocate Service

8. Adjust your tax withholding. One way to avoid repeating this year’s mistakes is to evaluate your withholding, and adjust if necessary. You can have your employer withhold more from your paycheck to help avoid having a deficit. If you receive Social Security income and also work, your Social Security income might be taxable – but you can sign up for voluntary withholding to avoid figuring out your total at the end of the year.

If you are not able to pay taxes because you are struggling with overwhelming debt, you may also consider getting help with those debts. Consider consulting a firm that helps with debt consolidation, debt resolution or debt settlement services.

Andrew Housser is a co-founder and CEO of Bills.com, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC providing comprehensive consumer credit advocacy and debt relief services. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.
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