What to Do if You Can’t Afford to Pay Your Tax Bill
By Emil Abedian, a Certified Public Accountant and founder of Anchor Bookkeeping, a service offering affordable yet personalized, one-on-one bookkeeping services for small business owners.
For most business owners, the end of tax season is a welcome relief. The scramble is over. Their books are reconciled. Their documents are submitted. Their return is filed. Not unlike spring cleaning, it’s time to pause for a breath and admire how tidy everything is before moving on to the next hurdle. But for others, although the stress of compiling their returns is over, what comes next can be even worse – the realization that they can’t pay the taxes they owe. If this is you, don’t whip out your credit card or dip in to your retirement fund just yet. There are steps you can follow if you can’t afford to pay the IRS right now.
Like an elephant, the IRS never forgets. So, by all accounts, avoidance is the worst approach to take. The IRS will hit you with a penalty if you fail to pay your taxes in full and also if you fail to file your return in time without filing for an extension.You’ll pay one half of one percent of your taxes owed each month for failure to pay and 5 percent of your tax bill each month if you fail to file all together. Add monthly interest to these penalties and your tax burden gets even higher.
Here are several reasonable options to consider depending on your situation.
If you can’t pay what you owe in taxes because of short-term financial hardship that will get better soon, you can apply for an extension of up to 120 days. You can set this up easily by using the Online Payment Agreement application and you won’t pay a fee to file. You’ll have to pay what you owe by automatic payments deducted from your checking account and agree to a .25 percent penalty each month.
Installment Agreement Request:
If you need more time than that, another option is to submit a request for a streamlined Installment Agreement with your return. If you owe less than $50,000 including your tax liability, interest and penalties and can prove that you cannot pay what you owe in full now, the IRS will allow you to pay in installments over 72 months. You also must not have had an installment plan in place in the last five years. You get to choose how much you pay and when you pay each month as long as it meets the minimum acceptable payment – factoring in the tax liability, interest and penalties. But, you must pay this amount on time each month to avoid defaulting.
If your situation is more dire and you can’t afford to pay any of your taxes and still keep your head above water, you may qualify for deferred payment, also called ‘Currently Not Collectible’ status. But, before approving this, the IRS will do a thorough review of your financial situation. You’ll submit a Collection Information Statement to prove your financial hardship. Keep in mind that your tax debt is only deferred, not erased. You’ll accrue penalties and interest on what you owe until your balance is paid. Any future refunds you would get are directly applied to your IRS debt. And, you’re expected to pay as soon as your situation improves.
Offer in Compromise:
Under certain circumstances, the IRS will also consider an Offer in Compromise which allows you to settle your tax debt for less than what you actually owe. If you have filed your tax returns, made your estimated tax payments and your federal tax deposits if you have employees, the IRS will consider a reduced amount proposed by you to settle your debt.
Interest and Penalties
The interest you’ll pay to the IRS for any of these options is unavoidable — it’s mandated by law. However, there is sometimes a chance that the IRS will waive your penalties. In general they will do so if you can show reasonable cause that you used “ordinary business care and prudence” to meet your tax obligations but were unable to. Situations that fall under reasonable cause include: fire, casualty or natural disaster; inability to obtain records and; death, serious illness, incapacitation or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family. If you have a clean tax history and all of your tax forms are in order, you may also qualify for a waiver based on the First Time Penalty Abatement policy.
In its own words, the IRS’ first strategic goal is to “empower and enable all taxpayers to meet their tax obligations.” The options laid out here for those who are struggling clearly support that. So, the best thing to do if you find yourself knee-deep in tax woes is not to wait. Consult with a tax professional as soon as possible and choose a course of action to get back on track.