Since 2017, tax season has looked different for many Americans. The Tax Cuts and Jobs Act changed the withholding tables, meaning Americans had more money in their paycheck but potentially smaller refunds — or worse, a tax bill — when returns are filed.
“If you can’t pay your taxes, your points of action should be based on your current financial status and how much you owe,” said Ted Kleinman, a certified public accountant and owner of US Tax Help. “The worst thing to do is (to) not take any action or to react in a delayed fashion.”
Here are six steps you should take if you can’t pay your income tax liability:
1. File Your Tax Return
Don’t think that you can hide from the IRS by not filing an income tax return. “The No. 1 thing you should not do is not file simply because you can’t pay,” said Bill Smith, the managing director of CBIZ MHM’s national tax office. “It’s a crime not to file a return.”
Plus, you could be charged a failure-to-file penalty of 5% on the amount you owe for each month your return is late, Smith said. The penalty won’t exceed 25% of what you owe, however.
For those who file but don’t pay, the IRS will enact a smaller penalty of 0.5% on what you owe each month until you pay in full. By filing, you give yourself more time to pay with a reduced penalty, which ultimately saves you money.
In either case, though, you will be charged interest on the amount you owe. The rate, which compounds daily, is determined quarterly and is based on the federal short-term rate plus 3%.
Even if you cannot pay your entire tax bill, pay a portion of it to reduce the amount of money that accrues interest and penalties. For example, if your tax bill is $2,200 and you pay nothing, you’ll accrue interest and penalties on the entire amount. But, if you can afford to pay $1,100 now, you can cut your interest and penalties in half. Make sure to direct the IRS to apply any payment you send directly to your tax bill first, not to the penalty or interest, Smith said.
3. Contact the IRS
Rather than avoiding your tax responsibility, call the IRS at 800-829-1040 to explain your situation, and determine which payment options might work best for you. The IRS might be able to provide temporary relief, such as delaying collections activity on your account so that you can meet your basic living expenses. Even so, this solution will not eliminate your debt, and although the IRS might be able to waive some of the penalties, it cannot waive interest.
4. Apply For a Full-Payment Agreement
For short-term issues in which you will be able to pay your entire tax bill within 120 days, including any interest and penalties, apply for a full-payment agreement. Interest and penalties will still accrue until you fully pay, but there is no additional fee to apply. Apply via the IRS website or by phone at 800-829-1040.
5. Sign Up For an Installment Agreement
To get more than 120 days to pay your tax debt of less than $50,000, apply for an installment agreement either online through the IRS Online Payment Agreement site or via Form 9465. By using the agreement, you’ll make monthly payments to satisfy your debt via your bank account, payroll deductions, online payments or with cash at a retail partner.
You’ll also have to pay a fee of $31 if you apply for your agreement online or $107 if you apply by phone, by mail, or in person and arrange to have your payments automatically debited from your bank account. If you pay by credit or debit card, check or money order, your fee will be $149 if you apply online or $225 if you apply by phone, by mail or in person. Fee reductions are available for low-income taxpayers.
An Offer in Compromise is an offer you make to the IRS to pay less than you owe in exchange for releasing you from the remaining debt. An OIC isn’t an old-fashioned negotiation, however, and getting an offer accepted isn’t easy, said Smith. For the IRS to accept, the offer must meet one of three criteria:
The IRS is unsure that you are liable for the taxes owed.
The IRS doesn’t think the amount owed is fully collectible, such as if your assets and income are less than you owe.
The IRS finds that requiring full payment would be ineffective or inequitable because of truly exceptional circumstances.
You must be current with your tax filings for the IRS to consider your application.
Once your offer is accepted, there are still ongoing conditions: You must file tax returns and make on-time payments for the next five years, said Kleinman. Failing to live up to this obligation can cause the offer in compromise to default and the matter to be sent to collections, he said.
Consequences of Not Paying Taxes
You will receive a letter from the IRS if you fail to pay the taxes you owe. The letter will state the amount you owe, including interest and penalties and request payment.
Failure to respond to the IRS requests can result in collections actions by the IRS, including filing a tax lien on your property or offsetting other refunds to which you might be entitled. A federal tax lien gives the IRS a claim against all of your property, and, if the IRS files a Notice of Federal Tax Lien in the public records, it can also hurt your credit score.
Smith said that in most cases of failure to pay, you have some time before anything particularly bad happens.
“The IRS isn’t an efficiency machine,” said Smith. It could take up to a year after you get an initial bill to get a notice that the IRS is taking collections actions.
Your tax bill could be bigger than it has to be if you’re not taking all the tax deductions and credits for which you qualify. Hiring a professional could help you reduce what you owe, but make sure you use someone reputable, said Smith. Additionally, if you have low income, you could qualify for free representation by a tax professional associated with a low-income taxpayer clinic, according to the Taxpayer Advocate Service.
