Fail to pay your taxes, and you'll face penalties, but you have plenty of options for relief.
The IRS knows basically everything about you. The IRS knows where you live, where you work, who you’re married to, and if you’ve ever taken a latte as a business expense, where you get your coffee.
Which is to say, if the IRS is looking for you, you can’t hide.
So before the agency garnishes your wages and freezes you bank accounts – and before you pack a bag and flee the country – here’s what to do if you owe money and can’t pay.
Don’t Skip Filing
If you’ve started preparing your return via online tax prep software or even walked into a physical location somewhere, only to learn you owe more than you can pay, don’t simply stop the process.
“You’re so much better off sending the return in, or filing a valid extension. Let’s say you owe $20,000 and you usually get a refund,” says Cari Weston, senior technical manager on the American Institute of Certified Public Accountants tax staff. “Don’t think to yourself, 'I don’t have the time.'”
Penalties for late filing begin to accrue on April 16, and they add up quickly. If you file more than two months after the due date, the minimum penalty is either 100 percent of the unpaid tax or $135, whichever is smaller. And that fine begins to rack up interest almost immediately.
Ask for Leniency
Under certain circumstances, some taxpayers can get out of paying the penalty.
“If you have a history of paying on time, you can ask if you can please waive the penalty,” Weston says. “The IRS will look at your history, and if you haven’t previously had a penalty, they have to waive the penalty the first time you ask. They won’t tell you that.”
Taxpayers who don’t qualify for the first-time waiver can request the penalty be waived for probable cause. The IRS also has a Fresh Start Program designed to help individuals and small business owners who owe back taxes by implementing a new installment program and making it easier to have a tax lien withdrawn.
Set Up a Payment Plan
Contacting the IRS can be overwhelming under the best of circumstances, but if you’re calling to tell the agency you can’t pay your taxes. it can be downright frightening. But Weston says
you shouldn't be intimidated.
“The person you call at the IRS to work out these payments, they are collectors,” she says. “They want you to pay as much as you can.”
If you owe less than $50,000, you can fill out Form 9465, Installment Agreement Request. In some cases, you can even complete the entire process online, with online payment options, without having to actually speak to an IRS representative.
“They will charge you a fee to get on an installment agreement,” Weston says, “but if you think you can pay the fee in less than 180 days, they’ll waive the fee.”
Even if the fee can’t be waived, the peace of mind of knowing you’re taking the right steps might be worth it.
“If you go to the IRS site, they really make it easy,” says Jackie Perlman, principal tax research analyst at The Tax Institute at H&R Block. “If you owe much from last year and the year before, you probably won’t qualify. But if you just owe a few thousand, you should be able to work out a payment plan with a minimum of fuss.”
Think you can pay $100 a month, but your minimum required payment is $20? Commit to the $20 and then pay the $100 when you can. You’ll be less likely to fall behind or default, which could cause you to incur other penalties.
In many cases, the IRS’s installment plan may be preferable to other payment options.
“There are pros and cons to putting it on your credit card,” Perlman says. “Put it on your credit card and you’re done with your taxes, but then you have credit card debt on your back, and if you’re already maxed out on your cards, that might not be the best thing in the world for you.” Taxpayers with high-interest credit cards, ongoing balances or other financial concerns might want to seriously consider the IRS plan.
Can’t afford a high-priced accountant or tax attorney? Look into other resources, including those offered through community centers and local libraries, tax prep software and, yes, even the IRS. The agency’s goal, after all, is get people to pay their taxes. But whatever you do, don’t ignore it.
“The absolute worst thing you can do is turtle down,” Weston says. “The IRS will work with you 99 percent of the time if you just communicate with them.”