Is cash tight? And you’re finding it difficult to pay your taxes? This is nothing to feel bad about, we’ve all experienced this dilemma at one time or the other, I know I have. And because of my experience, I know you might be considering not filing your taxes, I’m here to advise you AGAINST it, as not filing your taxes would be a way more expensive mistake.
Here’s a breakdown of the penalties for not filing your tax returns or for paying your taxes late, just for clarity:
If you don’t file your taxes on time, there’s a penalty of 5% of what you owe each month, but this won’t exceed 25% in total, and interest will be added. On the other hand, if you file but don’t pay on time, the penalty is smaller – just 0.5% per month of your unpaid tax, and this also caps at 25%, plus interest.
As you can see from the explanation above, the charges for not filing your taxes are 10 times the charge for not paying and can easily add up to a large debt in a few months. This is why it’s always advisable to file your tax returns on time, even though you don’t have the money to pay.
Here are some steps to take when cash is low and it looks like you might not be able to pay your due to Uncle Sam.
STEP 1: File your tax returns (Federal and state), even if you can’t afford to pay:
One thing to note is that the penalty for not filing your tax returns by the deadline is higher than the penalty for not paying the tax, this is why the first thing to do is to get your filing done. Once your filing is sorted, I advise all my clients to pay whatever they can to the IRS even if it’s as little as $100, this lets the IRS know what’s going on and opens up avenues to work with them so you don’t get steeper fines or worse go to jail (don’t be scared, this only happens in extreme cases).
STEP 2: The next thing to do is to know exactly how much you owe:
I know that summing up the amount you owe can be a daunting task but, it’s better to have a clear idea of how much you owe so you can tackle it than to let the bill and charges blindside you.
STEP 3: Try to pay off your state tax
I know most people are more afraid of the IRS than a state agency, but the truth is that the IRS is more flexible than state agencies, when it comes to trying to collect their due. The State agencies are prone to actions against your credit report or property faster, have fewer payment options or plans, and some states have worse penalties than the IRS.
So it’s best to get the state tax sorted so you can have some room to focus on the IRS.
STEP 4: Try to reduce your debt or work with the IRS to clear your debt
The best step to take when it comes to any form of debt that accrues interest over time is to try to get it cleared faster. There are a number of ways one can do this, and we’ll be going over them in detail now:
– You could charge your tax liability to your card at a 1.85%-1.98% convenience fee or apply for a debt consolidation loan from a bank or credit union, and try to clear your debt this way. The issue with this option is that you’re basically trading debts, you would have paid the government but might end up with a larger debt than you initially started with.
– You could also request a payment extension, there are different ways to go about this and I’ll try to be as brief as possible. You could try to file a six-month tax-filing extension using Form 4868, but this won’t help as it only gives you more time to file your tax returns but no extra time for payments. If you feel that you have a legitimate reason due to undue hardship you can apply for a six-month extension to pay your taxes using Form 1127.
When submitting this form, you’ll need to include a detailed statement showing your current assets and liabilities, as well as a breakdown of your income and expenses for the past three months. It is important to understand that if in the last 3 months, you make a frivolous expense like buying a car or a nice watch, you’re automatically disqualified, as the undue hardship extension is for individuals actually going through hard times or experienced something that really affected them, also if you have a property like a home that could finance the debt you, therefore, do not qualify.
– If you believe that it’ll take you more than a few months to pay your tax liability, you can consider applying for an Installment agreement. You can apply for this online at irs.gov or by mail using Form 9465-FS. This agreement can stop the IRS from taking enforced collection action, you’ll still owe penalties and interests, but your monthly payments let the IRS know you intend to make your payment.
– If you have savings or an emergency fund, now it’s time for an interest-free loan to yourself so you can pay off tax, and you can easily pay yourself off. If you own a home or have enough equity, you could also borrow from yourself with a home equity line of credit (HELOC). This kind of borrowing would turn a large IRS debt into manageable monthly payments to your lender.
– As a last resort you could file for an offer in compromise(OIC), this process can really reduce the value of the debt you owe the IRS, and it could also reduce the penalties and even interest on the debt, as you’re telling the government that you can’t afford to pay and you need their help. Why I advise that this should be a last option because it’s very hard to get the IRS to approve you for the offer as a lot of people apply for this every year. It takes a lot of time for the IRS to carefully go over every single thing you own and your ability to generate income.
I see a lot of companies regularly defraud a lot of unsuspecting individuals with the promise of easy OIC results, oftentimes promising too good to be true debt reduction values that people end up working with them and then lose thousands of dollars while their debt to the government steadily increases. You should know that you can easily monitor how your OIC processing is yourself and you could also call the IRS for updates. If you want to learn more about OIC you can visit the IRS website here.
STEP 5 Try to avoid more fees or penalties
The truth of the matter is that charges are always going to be accrued when you pay your taxes late, but you can try to mitigate or reduce these extra penalties, by ensuring you face the issue head-on.
In Conclusion
Here are the things to do if you can’t pay your taxes before the due date:
- Ensure you file your returns on time, this is the smartest move you can make as it removes a rather large penalty.
- Try to pay as much as you can before filing your returns, as this reduces the debt which in turn reduces the files and interests on it.
- Ensure you pay all state tax liabilities before you pay the IRS, as your state agencies aren’t as lenient as the IRS.
- Try to find money way you can, as the faster you can get your tax liabilities the better it is for you.
- Go through the various installment agreement options, and find what works for you.
The worst thing you can do is ignore your taxes thinking it’ll magically disappear, as you can lose properties or jail if the taxman comes for you. So get ahead of it today by contacting us or booking a free 15-minute call with me to help find out what works best in your situation.