What to Do When You Can't Afford to Pay Your Taxes
Discover what to do when you can't pay your taxes using a step-by-step plan, and learn how to avoid making the same mistakes in the future. It's important to understand all of your options and knowing where you stand, and creating a plan, is a great first step.
Often, we think our finances are in order only to find ourselves unprepared for when Tax Day rolls around.
Not being able to pay your taxes on time can be a serious and costly issue.
It can lead to repercussions far worse than what you can expect by just facing the matter at hand.
For one, the problem won't simply go away if you wait it out—if you do, interest will start to accrue on the amount you owe. And, in some extreme cases, tax evasion can lead to prison time!
That's one scenario you don't want to find yourself in.
If you're having difficulty paying your taxes, you're definitely not alone.
In fact, more than 17% of Americans owe the IRS around $100 billion in unpaid taxes collectively, and the number may be even larger than that!
Taking action now is your best option, because any time the IRS is involved, waiting—even for just one extra day—can hurt you a lot in the long run.
We're going to share some key techniques you may not have thought of that can help you get out of trouble this tax season, and avoid making the same mistakes next year!
Learning how to pay off your current tax debt as quickly as possible, while paying the fewest penalties and fees is key to getting out of tax debt as efficiently and effectively as possible.
Even if you've had trouble with your taxes in the past, applying these steps can help you face your tax debt head-on and start working towards a more financially savvy future.
File by the Deadline
The biggest mistake you can make when it comes to taxes is not filing them.
Not being able to pay them back immediately is one thing, pretending they don't exist or even accidentally forgetting them is another.
Just because you didn't file it, doesn't mean the IRS doesn't know about it
It's the IRS's job to make sure Americans are filing and paying their taxes properly and on time.
The hard reality is that someone, somewhere, knows if and when you owe tax money.
The only way to deal with taxes is to accept them as inevitable and face them head-on.
The penalties for not filing your taxes are worse than not being able to pay
Not being able to pay your taxes in full can feel embarrassing, and the amount owed may even seem overwhelming to you in the moment.
But what you'll face down the line if you don't file your taxes is much worse.
So make sure to grab those 1040's (that's the form you fill out for your tax return, for those of you who are new to paying taxes), and get filing!
You risk a penalty fee ranging from 5–25% of what you owe for not filing. The fee for filing late—known as a failure-to-file penalty—is 5% of taxes owed, and it increases by 5% every month, all the way to 25%.
By comparison, filing your taxes but not paying them back in full—a failure-to-pay penalty—results in a fee of 0.5%, which is much more manageable.
If you're at risk of a failure-to-file penalty, you risk being hit with a tax lien, which is essentially the government's legal claim against your property.
A tax lien allows the government to insure they will be paid by giving them interest in all your property, including real estate, personal property, and financial assets.
I have seen this firsthand with relatives and friends, and when it came time to sell a home, the IRS took part of the proceeds from the sale of the family home to settle the tax debt before anyone else got paid.
Without enough money for a new home down payment, one friend had to rent an apartment for two years just to be able to save enough for a down payment, and lost the house he really wanted.
The takeaway here is that even if you know you're not going to be able to pay your taxes, you should still file.
If you try to evade your taxes, you may end up in jail. This is rare, and typically only applies to those who hide assets and income so they owe less in taxes to the government than they really do.
If you truly can't pay back your taxes, it is unlikely that the IRS will ever penalize you with jail time, and the greatest concern should be the fees mentioned above.
Not filing on time will cause you to forfeit your tax refund. This is less important to those who can't pay, since the expectation is having to pay rather than receive a refund, but it is still important to keep in mind.
Pay as Much as Possible
The best way to get out of tax debt isn't a secret—pay back what you owe as soon as possible.
If you're reading this, chances are you feel you won't be able to pay your taxes in full come Tax Day, but you don't want that debt (and the risks associated with it) hanging over you either.
The best way to tackle the problem is with an aggressive payment plan, which starts with paying back as much as you can, as soon as you can!
The faster you pay back your taxes, the less interest can accrue
If you owe the government money and haven't paid it back yet, you're going to end up paying more over time than if you were to pay it all at once.
Interest builds on money owed. You will have to face monthly interest of about 3% on all money owed to the IRS until it's paid back in full.
Fees will grow monthly. As we've said before, the fee for paying late is relatively small at 0.5% a month.
The fees can reach up to 25% of what you owe, and fees and interest combined can add up quick.
That makes paying as much as you can, as early as you can, the best idea moving forward.
If you ignore tax bills, the IRS can take action
When you get a bill in the mail from the IRS, the last thing you want to do is pretend it never arrived.
When you do that, you give the IRS a chance to take collections action.
Ignoring the IRS can cause them to seize property or funds. The Internal Revenue Service can legally seize your assets, equal to what you owe, in lieu of payment.
This can take the form of legally having funds directly taken from your bank accounts, your property repossessed or seized, or levies attached to your home.
It's the sort of thing the IRS is unfortunately infamous for, and the best way to avoid experiencing it first-hand is to deal with any bills the moment you get them.
Even if you know you don't have the money to pay the bill, don't just ignore it.
It's best to contact the IRS, either on the phone or in person, and find out what options are available for your specific circumstances.
You can also look for professional assistance like an accountant who specializes in tax debt resolution, to help you navigate the process and complicated tax code.
You can also consider one of the many services out there with great reviews and years of experience.
Have a good look at the payment plan options we've listed below—the government just might be willing to work with you on a solution depending on your situation!
Tricks that save and earn money can help you pay your taxes sooner
Before Tax Day hits the calendar, you should have a clear idea how much you can reasonably put toward your taxes.
As we've said, more money paid now means less overall.
Afterward, start to consider ways you can save or even make money so that you can pay those taxes back as soon as possible.
Below are some ideas to help put funds toward your debt until it's paid off.
Budgeting is the key to saving money. There's no trick here, keeping track of your finances will help you see just how you spend—and save—your money.
Once a week, or even every two weeks on payday, write out a solid plan for how much you can spend that week, and what you'll spend it on.
While writing down your expenses, look for things to cut out—anything that's unnecessary—at least until the tax debt is paid.
Then, track what you actually spend on everything from groceries to lattes.
As the weeks comes to a close, review your purchases and see where you're falling behind, that way you don't make the same mistakes the next pay cycle!
Cut down monthly payments on loans or insurance when possible. If your credit score has increased at all in the past few years—pay those credit card balances down in full!—it's possible that you'll qualify for savings.
Whether it be a lower APR on a mortgage or lower premiums on things like car insurance, refinancing may save you a few hundred dollars a month in some cases, which could be put toward paying back the IRS.
Pick up extra work for a short time. Freelance and contract jobs can be a quick source of money that can give you a jumpstart with paying your taxes.
Even if the extra work is a lot to take on, keep in mind you can always return to your previous workload the moment you've finished paying back your debt.
Understand Payment Options
Flexibility and the IRS aren't exactly the two words you would think of together, but the reality is, there is more than one option when it comes to paying your taxes.
The country has a population of over 300 million—the government knows not every taxpayer is the same, and so when it comes to paying back taxes, there's a bit of flexibility offered for those that are lagging a bit behind.
Contacting the IRS makes sure everyone is on the same page
By contacting them directly, you can go over the different options available to you as a taxpayer, explain your situation, and discuss your eligibility for things like an extension to file or an installment plan.
The IRS can be contacted directly by phone. You can call800-829-1040 if you are an individual taxpayer or 800-829-4933 if you're representing a business.
For other phone numbers, you can check the contact page of the IRS website.
To be considered for certain payment plans, you will need to file the proper forms.
You can file forms by sending mail to the IRS's address in your state or electronically using the IRS's e-file system.
Some e-filing services are even close to free and still quite reliable, so consider this option if you prefer doing things electronically.
Also, make sure you are filing the correct version of the forms.
For example, even if you are filing for an extension with form 433, which version of that form you need to use (e.g. 433-A, 433-F, etc.) will vary depending on your employment status, for example.
An extension to file will give you 6 months to get your forms and money in order
If you know you'll have enough money to pay off your tax debt within 6 months, you may be eligible for an extension.
This will allow you to pay back the money owed within the time specified by the IRS.
To take advantage of this possible opportunity, you need to submit tax form 4868 by Tax Day in lieu of your 1040.
Afterward, at some point within the 6-month period, you will be expected to send in your tax return together with the money owed—in full.
The IRS will still charge interest on what you owe— but if you really cannot file your taxes by the tax day filing deadline, this is a viable option to consider.
Pay what you owe in installments over a time frame of up to 3 years
If eligible, you may be able to pay back your taxes in installments, much like an installment loan or installment agreement.
While this isn't the most cost-effective solution, it does offer some taxpayers a chance to pay down their debt in a time-frame that works with their lives and finances.
You may have up to three years to pay back your taxes. To apply, file form 9465 and you should hear back from the IRS within 30 days.
If you owe less than $10,000 in taxes, approval for an installment plan is almost guaranteed. This doesn't mean if you owe more, you won't get approved either.
But if you owe more than $10,000, it might be a good idea to discuss payment options and make an installment agreement with the IRS directly.
Fees for setting up payment plans range from $31–$225. Due to the possibly high cost of fees and amount of interest that can accrue over time, this is best for those who know they really can't pay off what they owe quickly.
If you can't pay your taxes and living expenses, consider declaring Temporary Hardship Status
Taxpayers who are really down on their luck—so much so, that they could experience acute financial hardship if they were made to pay back their taxes, even in installments—have the option to defer.
Deferment, in this case, is called Temporary Hardship or Currently Not Collectible (CNC) Status.
Under CNC Status, the IRS will not collect funds or property for up to two years. This will delay payment until the IRS deems you capable of paying back your debt.
If at the end of the two years, you are still experiencing temporary financial hardship, you can continue to opt for deferment, and the IRS will reassess your situation in intervals.
Interest and penalties will still accrue over the time in which your taxes are not being paid. Ultimately, this option is one of the priciest in the long run, and should only be considered if you truly have no other option.
To apply, fill out form 433 using information about your monthly expenses and income. If you succeed in applying but the IRS still attempts to collect, you can always go to Taxpayer Advocate Services for more help.
An Offer in Compromise is a possible last resort, much like a settlement
Settling debt is sometimes a quick and easy option with collection agencies, but with the IRS, it is more of a last resort that should only be considered if all the above options simply won't work in your situation.
Offer to pay what you can either in a lump sum within one year, or installments within two. Determining what you can pay involves adding up the value of all owned assets as well as calculating your monthly income over the length of 1–2 years.
If you have no disposable income but your debt is small enough, you can offer the IRS a set amount as a settlement, such as $1,000 lump sum.
This likely won't work, but it is certainly worth a try.
To apply for an Offer in Compromise, submit a 433 form, and a 656 form. Filling out these forms will require three previous months' records of your expenses and income.
Ultimately, less than half of applicants are approved.
Still, if you think you might be eligible for this option, it is worth a shot.
Fix the Root of the Problem
Hopefully, with what we've shared, you can pay your income taxes off, but what about the next time tax season rolls around?
It's important to learn how to pay off debt, but it's even more crucial to figure out how to stay debt-free in the first place, by identifying how you got here!
Accurate records lead to accurate taxes
Most Americans receive tax refunds.
If instead, you owe the IRS money, it is most likely because you are not withholding enough on your paycheck, or the amount you are withholding is inaccurate.
Check your W-4 to make sure enough income tax is taken from your paycheck monthly. If not, chances are some of the information on your W-4 is inaccurate or out of date (e.g. receiving exemptions you don't qualify for).
Inaccurate forms lead to inaccurate taxes, and come Tax Day, the IRS will expect the rest of the money that wasn't withheld.
Fixing those forms prevents this from happening!
A simple discussion with your workplace human resources staff could help resolve any questions quickly.
Double check everything so you don't forget to pay any taxes owed. Accidents can sometimes be just as costly.
Even if your W-4 looks good, maybe there are some taxes you forgot you owed.
Doing taxes thoroughly isn't fun, but it can save you a bigger headache down the road.
Double and triple check all tax forms, expenses, and income streams until you know your taxes as well as the IRS as does.
Working with a tax adviser can keep you on track for tax season
If you do your own taxes to save money—more power to you!
Saving money and understanding taxes on a personal level is a smart financial move.
But letting the pros do the work can help keep records as accurate as possible.
If you have enough income to spare, and the cost is smaller than what might be owed to the IRS otherwise, hiring an adviser or an accountant might be the way to go.
It's time to file your taxes and pay back what you can before the interest has a chance to grow
Accidents happen, mistakes can be made, and not everyone has their finances in order come Tax Day.
But before the IRS takes matters into its own hands, you should take matters into yours!
If nothing else, do NOT put off dealing with the situation.
You have to face it head-on, and at the very least, open the lines of communication with the IRS, instead of keeping mum or ignoring your issue.
File your taxes, even if you're not paying at all or in full, before the deadline.
After that, get in contact with the IRS and see what options might work for you.
Which among the payment options we listed above sounds good to you?
Have you experienced dealing with the IRS to resolve an issue with your tax payments?
Got any helpful tips for your fellow taxpayers this tax season?
Make sure to share them with us in the comments below!