Many Americans get a tax refund. But what if you owe the IRS and you simply cannot afford to pay your taxes?
“The government really isn’t that bad,” said Jack Nuckolls, a San Francisco-based national director of private client tax services at accounting firm BDO. “They understand people get behind,” he said. “What they don’t appreciate is you not communicating with them. They will hunt down assets and bank accounts. It’s best to communicate with them and find out some way to pay on a regular basis.”
If you just need a few weeks to accumulate funds for your payment, you can file your return and then wait for the IRS to send you your bill a few weeks later. “You may be subject to a little bit of penalty and interest because [your payment] didn’t accompany your return, but you can get a little bit more time to pay without a formal request,” said Sherrill Trovato, an enrolled agent in Fountain Valley, Calif. and president-elect of the National Association of Enrolled Agents
Always pay whatever you can as soon as you can to minimize penalties and interest.
If you are experiencing financial troubles, consider asking the IRS to waive penalties. “You can compose a letter to the government and explain reasonable cause as to why the tax wasn’t paid,” Nuckolls said.
Yet another option is to apply for a payment extension of up to 120 days. You must pay the full amount due within that period of time. You will be charged penalties and interest until you do pay in full, but there is no fee for this option. Just apply through an online payment agreement application, or by calling the IRS.
If you still need more time and owe less than $25,000, it is easy to set up an installment plan on IRS.gov. If you owe less than $10,000 and can pay off your debt within three years (and you are up to date on your previous years’ returns), you will be approved automatically. If you owe $25,000 or less and can afford to pay it off within five years, you’re still likely to have your request approved automatically; however, the IRS may request more information about your finances.
Make sure you propose terms you are certain you can meet.
“You have to tell them how much money you will pay per month,” Trovato said. “Always make sure you can at least make that payment. You can always send in more, but if you fail to make it you can end up in default.” Keep in mind that there are fees for installment plans, but low-income taxpayers can apply for lower fees.
One of the last resorts is to submit an offer in compromise.
This allows the taxpayer to pay part of the bill and the IRS forgives the rest. It is a possibility for some taxpayers, but it’s difficult to get accepted. An offer in compromise may be possible “If you’re never going to be able to pay it, and it’s clear you’re never going to make that much money,” Nuckolls said.
Please Note: This information is for educational purposes only. For specific advice, please contact a qualified tax professional.