Paying your taxes is your duty as an American citizen — but, unfortunately, sometimes life can get in the way. If you find yourself unable to afford your taxes, you might be scrambling to figure out what to do next.
Don’t panic. There are ways to make sure you fulfill your obligation without incurring too much unnecessary expense. In this post, we’ll cover everything you need to know about being unable to pay your taxes.
Here’s an overview of the topics we’ll cover in this post:
- What if I can’t pay my taxes?
- IRS payment plan alternatives
- Why would I be unable to pay my taxes?
- Getting the tax help you need
Remember: you’re not alone when it comes to tax debt. Community Tax’s team of professionals is here to help you every step of the way, and ensure that your tax obligations are fully met, so you can avoid any serious issues with the IRS — like an audit.
What if I can’t pay my taxes?
When many Americans go to file their taxes during tax season, they find that they owe money. In fact, according to the IRS, 14 million Americans owed back taxes for the 2018 tax year. That means that, in addition to the amount they owed for that tax year, they still held a tax burden from previous years. Whether they can’t afford to pay their balance, or they simply forgot to file taxes, suffice it to say that Americans very often find themselves in a position where paying taxes can be a financial burden.
If you find that your tax burden is more than you anticipated, and you’re asking yourself “what if I can’t afford to pay my taxes?”, follow these steps to fulfill your tax responsibility and avoid unnecessary tax penalties.
1.File by the deadline anyway
If you can’t afford to pay, you may feel like avoiding your taxes altogether. Out of sight, out of mind — but still very much looming over your head. It’s okay if you can’t pay right away. First thing’s first: file your taxes. The last thing you want on top of owing taxes is an audit, or the penalty for filing taxes late: 5% of your total tax burden, in addition to the taxes you owe (for the year 2019). Be sure you at least fill out and file your tax return on time, no matter your financial situation.
2.Pay what you can now
Pay what you can while you can. It may be tempting to hold off on paying any of your taxes until you can afford to pay the full sum, this will only increase the amount that you owe. Why’s that? The IRS charges interest on unpaid taxes at a rate of 3% daily + federal interest rates daily + 0.5% per month.
- Let’s say you owe $1,000 in taxes.
- Current federal interest rates are 5%. You will pay that plus 3% daily, plus 0.5% each month for a penalty.
- That means, after your first month, you’ll owe a little over $1,085.
The more you pay up front, the lower that total will be. Even if you can only pay $200, that will still lower your bill after the first month to $864.50. Plus, by filing and paying, you avoid the additional 5% tax penalty applied to those who do not file their taxes on time.
3.Set up an IRS payment plan
If you owe taxes and you can’t afford to pay the full sum up front when you file, one of the simplest options is to set up a payment plan with the IRS through their website. IRS installment agreements are intended for taxpayers who cannot afford the cost of a full payment upfront when they file their taxes, but expect that they will be able to pay within a set timeframe.
Take a look at these quick facts to get a sense of the terms for an IRS installment agreement:
How can you set up an installment plan? The IRS outlines 4 options:
- Apply online using the Payment Plan application tool
- Apply over the phone by calling 800-829-1040 for individuals, or 800-829-4933 for businesses
- You can download Form 9456, fill it out, and take it to an IRS walk-in office (note: the ongoing COVID-19 pandemic may affect whether IRS walk-in offices are currently open).
- After you fill Form 9456 out, you can also mail it in to the IRS directly using the address corresponding to your state of residence in the table below.
|If you live in:||Then use this address:|
|Alaska, Arizona, Colorado, Connecticut, Delaware, District of Columbia, Hawaii, Idaho, Illinois, Maine, Maryland, Massachusetts, Montana, Nevada, New Hampshire, New Jersey, New Mexico, North Dakota, Oregon, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Washington, Wisconsin, Wyoming||Department of the Treasury Internal Revenue Service 310 Lowell St. Stop 830 Andover, MA 01810|
|Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina, Texas, Virginia||Department of the Treasury Internal Revenue Service P.O. Box 47421 Stop 74 Doraville, GA 30362|
|Arkansas, California, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, New York, Ohio, Oklahoma, Pennsylvania, West Virginia||Department of the Treasury Internal Revenue Service Stop P-4 5000 Kansas City, MO 64999-0250|
Form 9456 gives taxpayers the option to pay directly with their bank accounts. If you can rely on your bank account having enough cash to comfortably handle the monthly payments, you can allow the IRS to directly withdraw the owed amount each month until your full payment is complete. It’s important to know that, even for those who do arrange a payment plan directly through the IRS, interest rates and late payment penalties still apply.
Still, by setting up a consistent payment, you will avoid further penalties and interest accrued by failing to pay any of your unpaid tax bill. If you need a helping hand when setting up an IRS payment agreement, a Community Tax representative will be happy to help.
IRS payment plan alternatives
While a payment plan arranged directly through the IRS is often the simplest option for ensuring that your tax burden is fully met and you avoid penalties, there are some other options available.
Delay tax collection
If you are a small business owner or are self employed, and are unable to pay your taxes in full, it’s possible to delay tax collection. This simply lets the IRS know that you are unable to pay for the time being, and that you will pay your tax burden once you have the funds necessary to do so.Note: interest still accrues on your tax total, and penalties for late and missed payments still apply.
File for Currently not Collectable status
Similar to delayed payments for small businesses, Currently not Collectible status grants taxpayers permission from the IRS to avoid paying for a certain amount of time. You will still owe your full tax burden to the IRS, and interest and penalties will continue to accrue for the period during which you are not paying. However, for the time allowed, the IRS will not attempt to collect on your debt.
Offer in Compromise
Another option is to submit an Offer in Compromise. Offers in compromise are available to some lower-income taxpayers who may not be able to pay all their taxes. The IRS will allow taxpayers to make offers in compromise if you prove that paying your full tax burden would incur financial hardship. And, thanks to the Fresh Start Program, the IRS has made Offer in Compromise terms more flexible.
It’s important to note, however, that the process can be complicated, and requires a non-refundable $186 fee to begin. If your tax burden is so great that paying even monthly installments would put you in a financially treacherous situation, an Offer in Compromise may be a worthwhile option. Community Tax is able to help guide you through the complicated Offer in Compromise process, to help ensure that you don’t pay more than you need.
Credit card payments and personal loans
It may also be tempting to pay down your tax burden using a credit card or personal loan acquired through a bank or payday lender. However, before rushing to private lenders to help ease your tax burden, it may be wise to consider a few factors:
- Credit cards, payday lenders, and even banks can charge high rates for personal loans. According to Experian, credit card APR can be in the ballpark of 20%. Personal loans can cost anywhere from 6% to 36% interest, with a 9.4% average. It’s likely you’ll be paying a much lower interest rate by simply agreeing to an IRS payment plan.
- Private lenders often have fees, penalties, and costs of their own. If you are considering using a private lender to help pay down IRS debt, be sure to extensively research the conditions that apply to taking out a loan.
- This option may negatively reflect your credit score — a measure of how trustworthy lending organizations consider you — if you are unable to pay back your debt to the private lender.
Why would I be unable to pay my taxes?
It’s also helpful to know why you might owe taxes in the first place. There are a handful of taxes that the government imposes on average citizens (and a few more that apply to business owners). Here’s a brief overview of the most common taxes that the average American will owe during the course of the year:
- Sales tax: this is the extra cost added to purchases of various kinds, imposed by your state or municipal government. You’re unlikely to owe sales tax during tax season, unless you live in a state that applies a use tax — a tax for using a product purchased elsewhere — and bought a significant amount of goods or services from a state that does not apply sales tax.
- Property tax: If you own property, like a house, condo, or land, you’ll owe property taxes. These are also imposed by state and local governments, so rates can vary significantly depending on the part of the country you live in. You’ll often owe these around tax season.
- Capital gains tax: if you have a retirement account, investment account, hold shares on the stock market, or profit off the sale of an asset, you’ll owe capital gains taxes. These, once again, are due at the end of the year.
- Income tax or payroll tax: This is the tax burden that many employed Americans first think of when they consider taxation. It’s the amount taken off each paycheck if you have a traditional hourly or 9 to 5 job. In some cases, however, like those working a tipped hourly job (like a waiter) or doing contract work (like a freelance videographer), you may owe quarterly taxes. If you don’t pay these, you’ll find you owe money come tax season.
Because missing quarterly tax deadlines or not realizing that your tipped wages are taxable is an easy way to end up with unpaid taxes, it’s worth spending some time covering.
The way that you pay taxes largely depends on the kind of job that you have. Here are a few different case examples:
- Full-time, salaried: If you have a full-time, salaried position, chances are that your employer’s HR department handles your taxes. When you fill out your Form I-9, you indicate the amount you want withheld from each paycheck. If that amount is too little, you may end up owing taxes.
- Hourly: This works much in a similar way to full-time, salaried work. It’s important to indicate your withholdings correctly when onboarding to ensure you pay the appropriate amount in taxes.
- Tipped hourly: Depending on the state(s) where you live and work, the laws governing tipped hourly employees may differ. However, in many states, tipped wages are not taxed through your employer’s payroll. Ask your company’s HR staff what the case may be regarding your state and your company policy, and be sure to file quarterly taxes as needed to avoid an unexpected bill come tax season.
- Contract and freelance: Similar to tipped wages, contracted and freelanced gigs often do not withhold taxes in the way a traditional I-9 employer might. If you collect a significant amount of income through contracted or freelanced jobs, it’s probably a good idea to look into filing and paying quarterly taxes.
How do I know how much I owe?
Every year, you are required to file your taxes on April 15th (or the nearest weekday). As noted above, this year (2020) the deadline to file 2019 taxes (recall: taxes are always filed for the previous year during the current year) has been moved to July 15.
When you file your taxes, you will find out how much you owe. If the amount you owe is greater than the amount you paid as indicated on your Form W2, you may owe taxes to the IRS. If that’s the case, and it’s more than you’re able to pay, refer to the steps above to get an idea of what you can do next.
If your tax situation is complicated, or you just need a little help making sure you get everything right, Community Tax is here to help.
Getting the tax help you need
An important step to being sure you pay the correct amount in taxes is filing correctly. If you need help filing, Community Tax’s specialist tax preparation services can help you through the process.
So, what if you can’t pay your taxes?Remember, these are the steps that are wise to follow:
- File taxes by the deadline anyway. There’s no benefit to putting off filing, and often a significant disadvantage to filing late: you’ll be charged extra fees.
- Pay what you can. This decreases the sum that you will owe interest on, lowering the amount you’ll owe when you start making payments on what you owe.
- Set up an IRS payment plan. The IRS allows you to pay your taxes in monthly installments, along with a bit of interest. Take advantage of this program and get your taxes squared away.
- Consider viable alternatives. If you can’t pay all your taxes, delaying collection, an Offer in Compromise, and Currently not Collectable status are useful ways to defer your burden to a later date when you expect to have more cash on hand. If you only need a little extra time, this can be a useful choice — but remember that interest and penalties will still accrue.
If, once you’ve successfully filed your taxes, you find that you owe money to the IRS, or simply find yourself in another difficult tax situation, our Tax Resolution specialists are available to help you navigate the situation from start to finish.