Tax season is an inevitable part of every year that leaves many taxpayers feeling anxious, especially if they realize they can’t afford to pay their taxes. However, it’s crucial to remember that ignoring the problem won’t make it go away. Let’s discuss the steps you should take if you find yourself in this predicament, to navigate your tax obligations confidently.
Filing On Time Is Paramount
Firstly, no matter your financial situation, it’s vital to file your tax return on time. The IRS can penalize you for both failing to file and failing to pay, with the former being much costlier. So even if you can’t pay the full amount owed, submit your return before the deadline to avoid unnecessary penalties.
Partial Payments: A Step in the Right Direction
Once you’ve filed your tax return, strive to pay as much of your tax bill as possible. Every dollar you pay now is one less dollar accruing interest and penalties. It shows the IRS that you’re making a good faith effort to meet your tax obligations.
Installment Agreements: A Long-Term Solution
Can’t pay your tax bill in full? Consider applying for an installment agreement with the IRS. This is a long-term payment plan where you pay off your tax debt in smaller, more manageable monthly installments. The IRS offers several types of installment agreements based on your tax debt and financial situation.
To apply for an installment agreement, you can use the IRS Online Payment Agreement tool, or mail Form 9465, Installment Agreement Request.
Offer in Compromise: A Possible Lifeline
In some cases, the IRS may accept an Offer in Compromise (OIC). An OIC allows you to settle your tax debt for less than the full amount you owe. The IRS will consider your unique set of facts and circumstances such as ability to pay, income, expenses, and asset equity. You should only pursue this option if you believe you genuinely can’t meet your tax debt obligations, as the IRS approves only a fraction of OIC applications.
Currently Not Collectible Status: A Temporary Respite
If paying your tax bill would cause significant financial hardship, the IRS may place your account in Currently Not Collectible (CNC) status. While this doesn’t forgive your debt, it halts collection actions temporarily until your financial situation improves. However, your tax debt will continue to accrue penalties and interest.
Seek Professional Help
If your tax situation is complex or your tax debt is significant, it may be wise to seek professional help. Tax professionals like Certified Public Accountants (CPAs), Enrolled Agents (EAs), or tax attorneys understand the tax code and can help negotiate with the IRS on your behalf.
If you can’t afford to pay your taxes, don’t panic or ignore the problem. The IRS offers several programs to help taxpayers manage their tax debt. By understanding these options and taking action promptly, you can navigate this stressful situation and get back on track financially. Remember, ignoring your tax obligations will only escalate the problem, leading to more penalties and interest, and potential legal action. Seek help, explore your options, and keep the lines of communication with the IRS open.
Frequently Asked Questions about Handling Unaffordable Taxes
1. What are the consequences if I don’t file my taxes on time?
The IRS levies penalties for both failing to file and failing to pay. The failure-to-file penalty is usually much steeper, around 5% of your unpaid taxes for each month your return is late, up to a maximum of 25%. If you’re over 60 days late, the minimum penalty is the lesser of $435 or 100% of your unpaid tax.
2. Can I negotiate my tax debt directly with the IRS?
Yes, the IRS offers several programs for taxpayers struggling to pay their taxes. You can negotiate for an installment agreement, an offer in compromise, or currently not collectible status. However, these processes can be complex, so seeking professional advice is often beneficial.
3. How long does the IRS give me to pay my taxes?
If you can’t pay your tax bill immediately, the IRS offers short-term (up to 120 days) and long-term (more than 120 days) payment plans. The specific terms will depend on your financial situation and the amount you owe.
4. Can the IRS waive penalties and interest?
Penalties and interest are generally statutory requirements, but the IRS does have a First Time Penalty Abatement policy for certain eligible taxpayers. If you meet the requirements, you may be able to have certain penalties waived. However, the IRS does not typically waive interest charges.
5. How can I apply for an installment agreement?
You can apply for an installment agreement online using the IRS Online Payment Agreement tool if you owe $50,000 or less in combined tax, penalties, and interest. If you owe more, you’ll need to mail a completed Form 9465, Installment Agreement Request, to the IRS.
6. What happens if my Offer in Compromise is rejected?
If your Offer in Compromise is rejected, the IRS will provide a detailed explanation of the reason for rejection. You can challenge the rejection by appealing the decision within 30 days from the date of the letter.
7. What is the impact on my credit score if I can’t pay my taxes?
Unpaid taxes can affect your credit score if the IRS files a Notice of Federal Tax Lien against you. The lien is a public record, and credit reporting agencies may include it in your credit report, which could lower your score significantly.
8. Can the IRS take my home or car if I can’t pay my taxes?
In extreme cases, the IRS can seize your property, including your home or car. However, this is generally a last resort. The IRS would rather work with you to find a suitable payment plan or alternative solution to your tax debt.
9. Can I qualify for tax forgiveness?
Under specific circumstances, such as a severe financial hardship, the IRS might temporarily delay collection activities, allowing you to stay in ‘Currently Not Collectible’ status. However, complete tax forgiveness, where the IRS waives your entire tax debt, is rare and usually only applies in extreme circumstances.
10. What is a tax lien?
A tax lien is a legal claim by the government against your property when you fail to pay a tax debt. It can impact all your property, including real estate, personal property, and financial assets. A federal tax lien exists after the IRS assesses your liability, sends a bill explaining what you owe, and you fail to pay in time.
11. How does an IRS levy differ from a lien?
While a lien is a legal claim against your property to secure payment of your tax debt, a levy is the actual seizure of your property to satisfy the debt. If you don’t pay or make arrangements to settle your tax debt, the IRS can levy, seize and sell any type of real or personal property you own or have an interest in.
12. How does the IRS determine whether I qualify for an Offer in Compromise?
The IRS considers various factors when deciding if you qualify for an Offer in Compromise. These include your ability to pay, your income, your expenses, and your asset equity. The IRS generally approves an OIC when the amount offered represents the most they can expect to collect within a reasonable period.
13. Can I discharge my tax debt in bankruptcy?
Certain federal tax debts may be dischargeable under Chapter 7 or Chapter 13 of the Bankruptcy Code. However, this is a complex area of law and not all tax debts are dischargeable. Several specific criteria must be met, which a bankruptcy attorney can explain in more detail.
14. Is it possible to get an extension to pay my taxes?
Yes, you can apply for an extension to file your federal tax return, which gives you until October 15. However, an extension to file is not an extension to pay. Taxes are still due by the regular filing deadline, typically April 15, and late payment penalties and interest will apply if you don’t pay by this date.
15. Are there specific programs for businesses that can’t pay their taxes?
Yes, businesses struggling to pay their taxes can also apply for an installment agreement or an offer in compromise. The IRS understands that businesses might face difficulties, and, similar to individual taxpayers, offers several options to help them meet their tax obligations.
16. What is the role of a Taxpayer Advocate in tax resolution?
The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that assists taxpayers facing financial hardship or who believe that an IRS process is not working as it should. They provide free assistance and work to ensure that every taxpayer understands their rights.
17. What happens if I don’t respond to IRS notices about unpaid taxes?
Ignoring IRS notices may lead to more severe penalties and interest, and in some cases, a levy on your wages or bank account, or a lien on your property. It is crucial to address these issues promptly, either by paying your tax debt or contacting the IRS to discuss alternative arrangements.
18. If I am unemployed, do I still have to pay taxes?
If you receive unemployment benefits during the year, those benefits are taxable. The IRS views these benefits as income. If you don’t have enough money withheld from these benefits, you may owe taxes on them when you file your tax return.
19. Can I set up a payment plan with the IRS myself, or do I need professional help?
While you can certainly set up a payment plan with the IRS yourself, having professional help from a tax professional or tax attorney can be beneficial, especially if you owe a substantial amount, your tax situation is complicated, or you need to negotiate with the IRS.
20. What are the penalties for not paying payroll taxes?
If you are a business owner and don’t pay your payroll taxes, the IRS can assess a “Trust Fund Recovery Penalty.” This penalty can equal up to 100% of the unpaid payroll taxes and can be assessed personally against the business owners or other responsible persons.
21. Is there a maximum amount I can owe the IRS?
There is no maximum amount that you can owe the IRS. However, the more you owe, the more likely the IRS is to take aggressive collection actions, like liens or levies.
22. What happens to my tax debt if I move out of the country?
Your tax debt does not disappear if you move out of the country. The IRS can still take actions to collect the debt, including levying your U.S. bank accounts and other U.S. property. Additionally, owing a significant amount to the IRS may impact your ability to obtain a U.S. passport.
23. What if I can’t afford to pay my state taxes?
Each state has its own tax laws and collection procedures. Most states offer payment plans and other options similar to the IRS if you cannot pay your state taxes. It is essential to contact your state’s taxation agency to understand your options better.