Finding yourself unable to pay your taxes by the deadline can be stressful, but it’s important to take proactive steps to address the situation. Ignoring the problem can lead to increased penalties and interest. Here’s what you should do if you can’t pay your taxes on time.

File Your Tax Return On Time

Even if you can’t pay the full amount you owe, it’s crucial to file your tax return by the deadline or request an extension. Filing on time can help you avoid the hefty failure-to-file penalty, which is typically 5% of the unpaid taxes for each month or part of a month that your return is late, up to a maximum of 25% of the unpaid taxes.

Pay What You Can

Paying as much as you can by the deadline reduces the amount of interest and penalties that will accrue on the unpaid balance. The IRS will charge interest on any unpaid amount, as well as a failure-to-pay penalty of 0.5% of the unpaid taxes for each month, up to 25% of the unpaid amount.

Consider an Installment Agreement

If you need more time to pay your tax bill, consider applying for an installment agreement with the IRS. This allows you to pay your taxes in smaller, more manageable monthly payments. There are two main types of installment agreements:

• Short-Term Payment Plan: If you can pay the full amount within 120 days, you may qualify for a short-term payment plan, which typically does not incur a setup fee.
• Long-Term Payment Plan: If you need more than 120 days, you can apply for a long-term payment plan (installment agreement), which may involve a setup fee but allows for extended payments over several years.

You can apply for an installment agreement online through the IRS website, by phone, or by submitting Form 9465.

Explore an Offer in Compromise

An Offer in Compromise (OIC) allows you to settle your tax debt for less than the full amount you owe if you meet certain criteria. The IRS considers your ability to pay, income, expenses, and asset equity. An OIC can be a good option if you genuinely cannot pay your tax debt in full or through an installment agreement. To apply, you need to complete Form 656 and submit it along with a detailed financial statement (Form 433-A or 433-B).

Request a Temporary Delay in Collection

If you are experiencing significant financial hardship, you can request that the IRS temporarily delay collection until your financial situation improves. The IRS may mark your account as “currently not collectible,” which means they will temporarily stop collection activities. However, interest and penalties will continue to accrue on the unpaid balance.

Consider a Personal Loan or Credit

In some cases, it may be more cost-effective to pay your tax debt using a personal loan or credit card. Compare the interest rates and fees with the IRS penalties and interest to determine which option is more advantageous. While this may not be ideal, it can prevent the accumulation of additional IRS penalties.

Seek Professional Help

Navigating tax debt and repayment options can be complex. Consulting with a tax professional can provide valuable guidance and help you explore all available options. A professional can also negotiate with the IRS on your behalf and help you develop a strategy to manage your tax debt effectively.

Stay Informed and Communicate with the IRS

Keeping open lines of communication with the IRS is crucial. If your financial situation changes, contact the IRS to update them and discuss your options. Staying informed and proactive can prevent further complications and help you find a manageable solution.

Conclusion

If you can’t pay your taxes by the deadline, it’s important to take immediate action to minimize penalties and interest. File your tax return on time, pay what you can, and explore options such as installment agreements, Offers in Compromise, or requesting a temporary delay in collection. Consulting with a tax professional can also provide valuable assistance in navigating your options and developing a plan to manage your tax debt.

Need help managing your tax debt? Schedule a consultation with us today and let us assist you in finding the best solution for your situation.