Since 1995 when Tax Day was moved from March 15th to April 15th, the welcoming of the spring season doubles as a reminder to fulfill your annual tax-filing duties. If you’re like most American taxpayers, you leave the heavy-lifting duties to automated e-file systems or tax professionals to square away your tax return, but that doesn’t always mean that everything is out of your hands. In the event that you owe the IRS any amount of money, you’ll need to seriously assess how your tax liability changes. If you’re scratching your head wondering “can I file taxes if I owe the IRS?” or “what do I do if I can’t pay the IRS?”, we’re here to help. Using this guide, we’ll walk you through everything you need to know about filing taxes when you owe money, the penalties to expect in certain circumstances, and smart ways to handle repayment on back taxes. Have a specific question in mind? Use the links below to navigate through this comprehensive guide:
- Filing Taxes If You Owe the IRS
- What Happens If You Owe the IRS and Don’t File?
- What Happens If You Owe the IRS and Don’t Pay?
- What Happens If You Owe the IRS and Can’t Pay?
- Option #1: Apply for a Hardship Extension
- Option #2: Set Up a Payment Plan
- Option #3: Request a Temporary Collection Delay
- How to Get Your Tax Debt Resolved
- Option #1: Contact a Tax Professional
- Option #2: Consider an Offer in Compromise
- Option #3: Sign Up for the IRS Fresh Start Program
Filing Taxes If You Owe the IRSTax season can be a stressful time. This is especially true if you owe back taxes or have recently found out you owe a tax balance to the IRS. Intimidating as it may seem, there are a number of viable avenues available to you to properly manage and repay your debts. For the 2020 year, Tax Day was officially pushed from April 15th to July 15th in light of the COVID-19 pandemic. This gives taxpayers an extra three months of leeway to file and assess their tax liability and find workable methods to offset any IRS bills owed. No two persons’ tax situation will be exactly alike—should you find yourself in a situation where you’re wondering “can I file taxes if I owe the IRS?” or “what can I do if I can’t pay my IRS bill?”, you may need some third-party assistance. We’re here to provide answers to those questions and give you the guidance and reassurance you need to stay on Uncle Sam’s good side.
What Happens If You Owe the IRS and Don’t File?One of the most common mistakes taxpayers who owe the IRS make is forgoing the filing process altogether. Owing the IRS does not relinquish you from your regular tax filing duties, in fact, doing so will only worsen your situation. When you fail to file your annual tax return, the IRS automatically slaps on a 5% penalty for each month past tax day that you neglect to file. The maximum failure to file penalty tops out at 25%, but it’s worth noting that while the percentage may be cut, you’ll still be responsible for paying any interest accrued on the bill up until it is paid in full. If you foresee that you will not be able to file your taxes by Tax Day, it’s imperative that you request an extension as soon as possible. When filed, signed, and approved, IRS Form 4868 grants an extra six months for you to turn in your tax return. It’s important to note that getting approved for an extension does not grant you more time to pay your taxes, it simply provides more time for you to file your return. Don’t forget that state and local taxes are also subject to additional failure-to-file penalties, which are entirely determined by state law. California, for example, imposes a 10% fee
What Happens If You Owe the IRS and Don’t Pay?In the event that you owe the IRS an outstanding tax balance and do not pay it off, you will become subject to a number of serious potential consequences. You’ll first receive a stern letter from the IRS which will quickly escalate into increasingly grievous penalties if you refuse to make a payment or configure a payment plan. Between the due date and the date your bill is finally paid, the sum of your unpaid taxes will accrue both penalties and interest. Interest will begin accruing on the date stated on your IRS notice and will compound daily until your tax balance is paid in full. The current interest rate sits at 5% while the failure to pay penalty is 0.5% per month. Prolonged evasion of paying your tax bill could result in the IRS taking money out of future tax refunds if you’re owed any. Continued negligence could mount to the IRS placing a federal tax lien against your property. Federal liens are designed to protect the government’s interests at all costs which means the IRS is authorized to make a legal claim on your real estate and other assets. If you’re too slow to take care of a federal tax lien, a tax levy could be the next step. Tax levies authorize the IRS to seize your assets to fully recoup your outstanding tax debt. Tax levies take many different forms, including:
- Property seizure: Everything from your house to your car can be seized by the IRS and sold to cover your remaining tax balance.
- Bank levies: The IRS can require your bank to prohibit any withdrawals from your account for 21 days. The IRS also can also withdraw funds from your account and require your financial institute to comply.
- Wage garnishment: The IRS can require your employer to hold back a portion of your paycheck and send it directly to the IRS until your debts are completely paid.
What Happens If You Owe the IRS and Can’t Pay?Despite their reputation as a federal institution of fear and debt collection, the IRS would much rather work with you to ensure you’re meeting your legal obligations than punish you. If you’re in a situation where you’re unable to pay your tax debt, there’s no need to panic. Understanding your options will help you better determine the best course of action when you owe the IRS but can’t afford to foot the bill. Here are a few common options for taxpayers with an outstanding balance they’re struggling to pay.
Option #1: Apply for a Hardship ExtensionFalling on hard times is a simple part of life, and the IRS can accommodate your financial troubles through a hardship extension. Available to taxpayers who are facing undue hardship, this extension allows up to 6 additional months to the standard repayment period. For an extension based on hardship, eligibility is contingent upon proof that demonstrates that paying your tax balance in full would cause extreme financial hardship. In the words of the IRS: “The term ‘undue hardship’ means more than an inconvenience. You must show you will have a substantial financial loss (such as selling property at a sacrifice price) if you pay your tax on the date it is due.” Action required: As soon as you become aware of an outstanding tax liability that you cannot pay, you should file IRS Form 1127. Within this application form, you will be expected to provide a detailed account of your reason for applying and any supporting documentation that can certify your claim. Supporting documentation includes:
- A statement of assets and liabilities at the end of last month. (This statement should detail book and market values of assets and whether securities are listed or unlisted.)
- An itemized list of income and expenses for each of the 3 months prior to the tax bill due date.