According to Forbes, about 7 million Americans fail to pay their taxes every year. This accounts for about 5% of the population that fails to meet their required obligation to Uncle Sam dutifully. So what happens when you’re just done preparing your tax return and notice you owe the IRS a considerable amount of money that you can’t afford to pay?
The realization that you can’t afford to pay your taxes can be stressful and burdensome, but you don’t have to worry about it. Here are some steps you can take to ensure that you don’t land on the wrong side of the IRS — and while we can’t assure you it’s easy, we can guarantee you it’s not impossible.
1. File Your Return on Time
Despite the fact that you can’t afford to pay your tax, you need to finish filing and send the returns by the deadline. This is because the IRS has two types of tax penalties- one for filing your returns late and one for failing to pay your taxes- and you don’t want to face both penalties.
The penalty for late filing is 5% of the taxes you owe the IRS, for each month your returns are late, up to a maximum of 25%. On the other hand, the late payment penalty is just about 0.5% of your due taxes. This means sitting and watching helplessly rather than filing your returns garners you more penalty than you would pay when you filed.
The general rule of thumb is sending in your returns by the deadline, if not long before. If you can pay at least some percentage of the amount owed, then make sure you do so rather than waiting to pay the whole amount in full.
2. Review Your Options for Paying – And Do the Math
It does not matter whether you owe the IRS $100 or $10000, but the first thing should be seeking alternative sources to pay the money.
There are many possible options arrayed for you, like using your credit card to pay, tapping into your home equity, getting a personal loan, or digging into your savings. You could even borrow from friends and family, to ensure you settle the taxes. The bottom line is getting money by any means to pay your tax returns in full to avoid the possible consequences of not paying.
However, it would be best if you weighed in the interest rates of the loans and credit cards to avoid landing yourself into more problems than you already have. Only use your credit card or take a loan when you are sure you can repay fairly quickly. It is also worth noting that the IRS charges processing fees for paying your income tax with a credit card, which increases the overall costs.
3. Check Your Timeline
The best thing is to always pay your taxes in full and at the right time. Sometimes, the deadline for payment may be due just before you get your next paycheck. In such a scenario, you should file and send your returns as you wait for your check and accept the late payment penalty. Ensure you file and send you returns on time, and the IRS will send you a letter indicating how much you owe them and the additional interest.
However, your tax bill will take a little longer before it gets solved, and the penalties will still accrue interest until you pay. The upside on this is that you will not have to lend money from other sources, thus reducing your interest rates significantly.
This plan should be a short term commitment, and your immediate goal should be to settle with the IRS the soonest time possible. The longer you wait to settle the bills, the greater the actions the IRS will take in placing a lien against your property or garnishing your wages.
4. Consider Setting up an Installment Agreement
Believe it or not, the IRS is not your enemy. You can set up a payment plan and pay what you owe them for as long as six years.
With an installment plan, you pay the IRS a little amount of money, which is spread over a period of time. However, the agreement does not exempt you from paying your penalties, and you have to atone for each penny until you settle your balance. The interest and penalties will go down as you continue paying your remaining balance.
Applying for an installment agreement is pretty straightforward, only if you have:
- Already filed your tax returns.
- You can pay off for what you owe them in 72 monthly installments or less
- And owe the IRS no more than $50,000 ($100,000 for short plan)
Here is a clear outline of everything you need to know about filing the IRS installment agreement.
5. Use an Offer in Compromise
If you don’t have the money, and all the payment plans are failing you, there is one last option- offer in compromise. You need to know that you should only use this when everything has gone south, and you have no alternative than getting one.
Making an offer in compromise means offering the IRS to make lump-sum amounts of money or fixed monthly installments for a short period. The IRS agrees to receive a lesser amount owed to satisfy your tax obligation. This process requires you to pay an application fee of $150 and submit a personal financial statement in addition to form 656.
After you’ve provided the information required, the IRS validates that you are unable to pay the amount needed, and your offer is accepted. After the acceptance, you agree to pay your taxes in full and on time after five years since the approval. However, you need to be prepared because these offers are evaluated on a case to case basis, and yours might fail to get approved.
6. Engage a Qualified Tax Attorney
“He who acts as his own attorney has a fool for a client.”
You may talk yourself into accepting that you cannot afford the money to hire an attorney. But the question in place should be, “How can I afford not to hire an attorney?” Failing to hire an attorney at such a crucial period is indirectly letting the IRS have their way with your wages, property, and bank accounts.
Without the knowledge of a tax attorney, you may lose on valuable advice, affordable IRS compromises, lesser tax penalties, and payment plans. An attorney will advise you on all the possible solutions you should consider if you don’t have the money to pay the taxes. Besides, they will help you stay afloat with all necessary expenses and prevent the IRS from having a hold on your property.
At Silver Tax Group, we can help you get your life back on track by solving all your tax-related issues. Our qualified and highly trained lawyers concentrate on helping individuals and businesses get tax relief and resolving tax problems at both state and federal levels. For more information, feel free to talk to us, and we will be more than willing to assist.