What happens when tax day arrives and you can’t pay what you owe? Don’t panic: The Internal Revenue Service has programs to help. From requesting installment payments to getting an extension, you have options. However, the last thing you should do is ignore the problem. Penalties for nonpayment are 0.5 percent a month of what you owe, which can go up to 25 percent, while penalties for not filing are 5 percent a month, which can also go up to 25 percent. Plus, the IRS can seize your property including homes, cars, wages and bank accounts to satisfy your tax debt.
Even partial payment is better than no payment. The IRS recommends you scrape together enough cash to cover at least some of your tax tab. If you're truly tapped out, consider a bank loan or using a credit card to pay what you owe. The interest rate and fees banks charge could be lower than interest and penalties the IRS charges for late payment, especially if it takes you six months or more to pay off your tax bill. The more you put down now, the less you pay in penalties and interest. Pay at least 90 percent of what you owe, and you won't face any late-payment penalties. However, you'll have to factor in credit or debit card fees.
If you can't pay taxes because you're unemployed, the Fresh Start program is your best bet. If you've been out of work for 30 days or more before tax day, the IRS could give you a six-month break on penalties for failure to pay. The rule also applies to those who are self-employed and experienced a drop in business income of at least 25 percent in a calendar year. To qualify, your annual income can't exceed $200,000 for joint filers or $100,000 for single filers -- nor can filers owe more than $50,000 in taxes. Plus, you need to pay what you owe in full within six months of tax day. You won't owe nonpayment penalties, but the IRS does have to charge interest of 3 percent a year on unpaid back taxes. To take advantage of Fresh Start, fill out Form 1127A.
If you owe $50,000 or less, apply for an IRS installment payment plan. If you owe less than $10,000, you're guaranteed an installment plan if you've paid all your taxes for the last five years and request a plan of three years or less. However, you'll owe a one-time fee of $43 to $105 if you can't pay your bill within 120 days. Before you negotiate with the IRS, calculate the monthly payment you can afford. The agency requires a minimum of $25 a month -- and will give taxpayers up to six years to pay their balances. Setting up an installment plan doesn't let you off the hook for interest on what you still owe or penalties for late payment. Also, if you haven't paid your balance by next year's tax season, your refund will go towards what you owe. To request an installment plan, fill out Form 9465-FS. Consider having payments deducted directly from your checking account, as the IRS could cancel your payment plan if you have several late installments.
You can get extra time to fork over taxes, depending on your circumstances. The IRS grants payment extensions of 60 days to 120 days for people who can pay taxes in full. This means fewer penalties and less interest than if you spread payments over six months or longer. However, you get only one extension, so be sure you can really pay it by the due date before you ask for more time. To see if you qualify, fill out the IRS's online payment agreement application. The IRS could also ask you to complete a collection information statement and submit proof of your financial status. Be ready to provide updated financial details while the IRS considers your request.
If you're convinced that you'll never be able to cover your tax bill, make the IRS an offer in compromise to settle for less than what you owe. To decide whether to accept an offer in compromise, the IRS looks at your income, expenses, assets and ability to pay. The agency approves a deal if it believes the amount you offer is the most it will collect within a reasonable period. You can pay in a lump sum or in monthly installments. To make an offer, fill out forms 433-A and 656(s) and send a $150 application fee. You're not eligible if you filed late or if you're in bankruptcy.
- TurboTax: What to Do if You Can't Pay Your Federal or State Income Taxes
- Internal Revenue Service: Tips for Taxpayers Who Can't Pay Their Taxes on Time
- Internal Revenue Service: Can't Pay the Tax You Owe?
- Internal Revenue Service: Three Ways to Pay Your Federal Income Tax
- Internal Revenue Service: Payment Plans, Installment Agreements
- Internal Revenue Service: Legislation Allows Partial Payment Option
- Internal Revenue Service: Offer in Compromise
- MSN Money: It's Tax Day: What If You Can't File?
- Reuters: What If You Can't Pay Your Taxes?
- Internal Revenue Service: The IRS Collection Process
- Internal Revenue Service: IRS Offers New Penalty Relief and Expanded Installment Agreements to Taxpayers under Expanded Fresh Start Initiative
- Internal Revenue Service: Form 1127-A
- Interntal Revenue Service: Form 9465-FS
- Internal Revenue Service: Online Payment Agreement Application
- Internal Revenue Service: Form 433-A
- Internal Revenue Service: Form 656(s)