What to Do If You Can't Pay Your Taxes on Time

As the tax deadline looms, it is an appropriate time to explore what can happen to a taxpayer who is unable to make their tax payment to the IRS. While this is not a situation you typically plan on being in, it happens to the best of us. At least you have a few different options. In general, a late payment will result in certain penalties being assessed, but if the situation is managed proactively, these can be minimized. Ignoring the situation is the single worst option and should be avoided. The IRS can and will hold you accountable.

Potential Penalties

The IRS makes a significant distinction between a taxpayer who fails to file a tax return and one who fails to pay his or her outstanding tax debt. The penalty for ?Failure to File? is far more expensive, currently amounting to five percent of the outstanding tax bill per month until the return has been filed. This amount is capped at twenty-five percent, but at that point, other penalties may come into play. The penalty for ?Failure to Pay? is currently just one percent of the outstanding tax bill per month. It is important to remember that this penalty is assessed in addition to the ?Failure to File? penalty if no return is filed because both apply.

To put the difference between these costs into perspective, consider an example in which your outstanding tax bill is $5000 and no return is filed. In this case, the failure to file penalty will be $250 per month, plus an additional $50 per month for failing to pay. This results in an additional cost of $300 per month. When compared to the case of simply being unable to pay at only $50 per month, it quickly becomes apparent that the cost of not filing is too significant to ignore. The bottom line is to get the return filed on time even if you know you won?t be able to pay. This is where grabbing a copy of tax software such as TurboTax can come in handy since it?s cheap and easy, and you can file your taxes online in a matter of minutes.

Payment Options

While it is clear from the above discussion that not filing one?s taxes is not a prudent choice, the question remains as to what are the options available if you find yourself unable to make the payment when the tax is due. While every situation is unique, the following list of options may be considered to address any existing deficiency.

Credit Cards ? While the interest rate on credit cards can be quite high, at one percent per month, the interest charged on late taxes may be higher if you have a low-interest or zero percent credit card available. It is important to weigh the relative cost of each option, but there is an additional advantage to staying off of the IRS?s radar. With this option, you are required to make payment through an IRS approved processor. This processor will likely charge a fee that may be as high as two and a half percent, so that transaction fee should be considered when assessing this option. It?s not an ideal option, but when you owe the IRS money there are few good options.

Borrow Money ? If you are only temporarily unable to make the payment due to a financial hardship or unexpected medical bill, a short-term loan may be a good option. This may mean taking a 401k loan or a personal loan from a family-member or friend. In either case, there is an associated cost with borrowing that should be considered. Borrowing from friends or family can strain relationships and tapping into your nest egg can hinder your retirement prospects.

Liquidate Assets ? It may be necessary to sell something of value in order to pay your taxes. This may range from jewelry to a car, but if you really feel you have no other viable options or if you just have stuff sitting around that you don?t really need, this may not be such a bad alternative.

Options Directly From the IRS

If none of the above options are viable, the IRS offers two alternatives that may be considered. The first is for those who believe that they can make the full payment over time, while the second is reserved for those who do not believe they will ever be able to meet the debt burden. The following is a brief discussion of each.

Installment Agreement Request ? In order to request this option, you would file Form 9465 with your return. The form requires the taxpayer to propose the amount that he or she will pay each month and the timing of the payments. If approved, you will have the ability to pay in installments over time. There is a fee for filing such a request and interest payments will accrue until the balance is completely paid, but it?s far better than not filing or paying at all and letting the penalties stack up.

Offer in Compromise ? In order to request this option, you must file Form 656 in addition to an information sheet, Form 433A. You are essentially asking the IRS to accept less than the full amount owed because of dire financial circumstances. You will be required to provide detailed financial information and make a proposal as to the amount to be paid. There is also a fee for this type of application. Don?t expect this option to be an easy way to get out of paying the IRS as much money because you truly do need to show a significant financial hardship that is preventing you from making payment.

No matter what the reason you?re unable to pay, whatever you do, be sure to file your return on time no matter what. The failure to file penalty is significant and it will only make matters much, much worse. After you?ve filed, take the time to sit down and look at all of your options. It might take a month or two to come up with everything needed to get that tax debt paid, but the sooner you start planning, the better off you?ll be and the less you?ll pay in penalties or interest.

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2. Poll: Have You Filed Your Taxes Yet?
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4. How Does Getting Married Affect My Taxes?
5. Do You Have to Pay taxes on Unemployment Income?

Source: http://genxfinance.com/what-to-do-if-you-cant-pay-your-taxes-on-time/

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