Consumer Comeback Blog

Owe Taxes But Can’t Pay? Consider These Options

Written by Jeffrey Trull

empty-pocket-cant-pay-taxesIt’s one of the worst surprises when preparing your taxes: Finding you owe money to the IRS. Forget celebrating a refund, you’ll need to pay up — and fast.

If you weren’t planning to write a check to the IRS, you might have trouble coming up with the cash that’s due along with your return on April 15.

If you owe taxes and can’t pay, pursue one of the options below.

Don’t skip filing

No matter what you do, don’t sit back and watch tax day pass without taking any action. Not filing a return or filing for an extension means you’ll face bigger penalties from the IRS.

If you don’t file, you’ll be hit with a 5% per month “failure-to-file” penalty on what you owe. This fine continues until you hit the max of 25% of what you owe.

If you don’t pay on time, regardless of if you choose one of the options below, you’ll generally be charged failure-to-pay interest on what you owe at a rate of 0.5% per month.

Even if you can’t pay your taxes on time, the IRS recommends still filing your return or taking other action that will avoid a failure-to-file penalty. If you file more than 60 days late, the penalty is generally the lesser of $135 or 100% of the unpaid tax.

Having hopefully talked you out of inaction, consider the options you do have.

Option 1: Request to pay in installments

If your return is ready to file but you can’t come up with all the money at once, you can request to pay over time.

After filing your return, visit the IRS website for filing installment agreements. Those who owe less than $50,000 in tax, penalties, and interest can get instant approval of their proposed repayment plan. You can also complete this process by calling the IRS or mailing in a Form 9465.

To complete this process, taxpayers propose their repayment schedule, like paying $100 a month towards the $1,000 balance you owe. The IRS says your proposal is generally automatically approved if you owe $25,000 or less and your repayment plan does not extend beyond 60 months.

You will be charged a $105 one-time fee for setting up this payment plan. However, you can drop this down to just $52 if you agree to online payments or to $43 if you make less than a certain amount.

Even if you owe more or need longer to pay, the IRS is still likely to work with you on reasonable terms. You may just need to file some extra paperwork.

One drawback to installment deals: you can’t use them every year. If you’ve paid late in past years or are still paying, you might not qualify for this option.

Since you’re borrowing from the IRS, you’ll have to pay interest on your balance while on the installment plan, too.

Beware that you may also see some bad news on your credit report. The IRS could file a “Notice of Federal Tax Lien” against you, which can be as damaging as having a bankruptcy on your credit report. The lien stays on your credit report as long as you owe taxes. The good news is if you owe less than $10,000, the IRS often won’t place this lien.

Option 2: File an extension

If you’re not prepared to file, you can request an extension. While the IRS doesn’t recommend you file an extension if you can’t pay your taxes, it’s still another option to consider.

To file for an extension, mail in or e-file an IRS Form 4868 by the April 15 deadline.

After this, you’ll need to file your return by Oct. 15, which hopefully gives you plenty of time to come up with the money. You’ll still be able to request installment payments if you need them, too.

Even if you file an extension, you’re not off the hook on interest and penalties. Tax payments are due on April 15, extension or not. The IRS will assess interest and penalties starting on tax day no matter how long you wait to file.

Option 3: Find another way to pay

If the first two options don’t suit you, the last of the more common options is to find a way to pay the IRS on time. Consider other options like:

  • Pay by credit card. The IRS does take payments by credit card. However you’ll incur a flat fee of 1.88-2.35% of your bill. Don’t forget to factor in credit card interest if you can’t pay your bill.
  • Personal loans. If you’re comfortable and able to, borrowing from friends and family is an option. Just be cautious.
  • Other lines of credit. The IRS recommends considering a home equity loan as an option to pay as it may cost less in interest and fees than options the IRS provides.

This isn’t a complete list of options. Find more information on the IRS web page with help for when you can’t pay your taxes. You can talk to the IRS or get advice from a tax professional for more help on your personal case.

Of course, don’t forget to prepare for next year. If you have the correct amount of taxes withheld form your paycheck or make appropriate quarterly payments, you’ll decrease the chance you’ll owe taxes again.

(photo credit: danielmoyle)