6 steps to take if you can't pay your taxes | News
By Andrew Housser
Many Americans go blindly into the tax season not knowing whether they will get a refund, or owe money to the Internal Revenue Service (IRS) and/or their state government. More than half of taxpayers will owe some amount. In these financial times, finding this cash can sometimes seem daunting. But if you owe, and lack enough money in reserves to pay the entire debt, you can take many steps to stay on Uncle Sam's good side.
1. File anyway
The penalty for failing to file a tax return is 10 times higher than the penalty for failing to pay taxes. For this reason, even those who are unable to pay anything right now still need to file returns by the April 15 deadline. The penalty for failing to file is 5 percent per month. The penalty for failure to pay 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. It is also possible for the IRS to file on a taxpayer's behalf using limited information. Because this type of filing often does not include deductions or tax credits, the amount the IRS calculates is likely to be more than what a taxpayer owes.
2. Ask for an extension
If there is absolutely no way to file by April 15, the IRS might grant a six-month extension. This gives taxpayers until October to file. However, there will still be a monthly failure-to-pay penalty. Occasionally, the IRS will exempt taxpayers from penalties if there is reasonable cause for the delay. Some reasonable causes include death in the family, a natural disaster like Superstorm Sandy, divorce, active military duty or illness. To ask for this exemption, send a certified letter to the address on a past-due notice received from the IRS.
3. Try to pay something
Even if it is not the full amount, paying something toward a tax bill will decrease the amount of interest accrued on the unpaid balance. While a partial payment is better than no payment, the IRS will still charge a monthly failure-to-pay penalty.
4. Tap resources
In a worst-case scenario, tax debt can be paid with a low-interest credit card, a home equity line of credit or a loan from a family member. While not highly recommended, these solutions can be cheapest in the long run because they help the taxpayer avoid the IRS penalty fees (but not interest).
5. Make monthly payments
On federal taxes, the IRS allows for monthly installments of up to three years if the total tax debt is $10,000 or less (not counting interest and penalties). There is a one-time fee of $105 to initiate this plan. That price drops to $52 if payments are automatically debited from a bank account each month. Many states also allow taxpayers to pay in monthly installments. If paying the federal tax bill is highly improbable, taxpayers may be able to file (for a fee) 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. A tax resolution debt specialist is extremely helpful in negotiating this process.
6. Get an advocate
Taxpayers who are unable to resolve tax problems on their own, or who have tax problems that are causing financial difficulties for them, their family or their business, can contact the IRS's free Taxpayer Advocate Service. Each state has a local taxpayer advocate. The national hotline number is 1-877-777-4778.
It is in a taxpayer's favor to keep the lines of communication open with the IRS and to be proactive about working out a payment plan regardless of one's financial circumstances. Whether working on one's own with the IRS, or with the help of a tax debt resolution expert, the effort is worth it. Avoiding filing or paying taxes will only lead to more debt and greater stress.