Last updated Jun. 23, 2024 by Peter Jakes
Tax season can be daunting, and for many, the arrival of a tax bill can bring significant stress, especially if you can’t afford to pay it. Ignoring your tax obligations will only compound the issue, leading to penalties, interest, and potentially severe legal consequences. Instead, taking proactive steps can help you manage and ultimately resolve your financial burden. Here are nine comprehensive steps to take if you discover that you can’t afford your taxes.
1. Don’t Ignore the Problem
The first critical step when you can’t afford your taxes is to confront the issue head-on. Ignoring the problem will not make it go away and can worsen the situation. The Internal Revenue Service (IRS) has the authority to impose significant penalties, interest, and even legal actions like liens and levies against your assets. Promptly addressing your tax situation can help mitigate these potential consequences.
2. File Your Tax Return On Time
Even if you can’t pay your taxes, you should still file your tax return on time. Filing late adds another layer of penalties, specifically the "failure-to-file" penalty, which is typically 5% of your unpaid taxes for each month your tax return is late, up to 25%. By filing on time, you avoid this additional penalty and demonstrate your willingness to comply with tax obligations.
✓ Short Answer
If you can’t afford to pay your taxes, don’t ignore the issue. Follow these nine steps: confront the problem, file your return on time, pay as much as you can, explore payment plans, submit an offer in compromise, ask for penalty abatement, consult a tax professional, check if you qualify for specific relief programs, and adjust your withholdings and estimated taxes for the future.
✓ Short Answer
If you can’t afford to pay your taxes, don’t ignore the issue. Follow these nine steps: confront the problem, file your return on time, pay as much as you can, explore payment plans, submit an offer in compromise, ask for penalty abatement, consult a tax professional, check if you qualify for specific relief programs, and adjust your withholdings and estimated taxes for the future.
3. Pay What You Can
Another step to take is to pay as much as you can afford by the tax deadline. Even a partial payment can help reduce the amount of interest and penalties that will accrue on the remaining balance. Moreover, partial payments signal to the IRS that you’re making an effort to meet your obligations, which can be beneficial when negotiating future payment arrangements.
4. Consider an Installment Agreement
If you cannot pay your entire tax bill at once, the IRS offers installment agreements that allow you to pay your taxes in monthly installments over a period of time. There are different types of installment agreements, depending on your circumstances:
- Short-Term Payment Plans: If you can pay off your balance within 120 days, this might be the best option, as it generally incurs lower fees.
- Long-Term Payment Plans: For those who need more than 120 days, these plans offer extended payment periods but may come with higher setup fees and continued interest and penalties.
To apply for an installment agreement, visit the IRS website or submit Form 9465.
5. Explore an Offer in Compromise
An Offer in Compromise (OIC) is a program that allows you to settle your tax debt for less than the full amount you owe under certain conditions. The IRS considers your ability to pay, income, expenses, and asset equity. If the IRS believes they won’t be able to collect the full amount from you, they might accept a lesser amount.
Applying for an OIC can be complex, requiring you to complete Form 656 and Form 433-A (OIC), among other documentation. It’s often beneficial to seek professional assistance when applying for an OIC.
6. Request Penalty Abatement
If you have a good reason for not being able to pay your taxes, such as a serious illness or natural disaster, you may qualify for penalty abatement. This means the IRS may waive certain penalties. To request penalty abatement, you need to write a letter to the IRS explaining your situation, or fill out Form 843. Keep in mind that interest on unpaid taxes will still accrue, so tackling your principal balance remains essential.
7. Consult a Tax Professional
Navigating the tax codes and IRS regulations can be overwhelming and stressful. Hiring a tax professional, such as a certified public accountant (CPA) or an enrolled agent, can provide invaluable assistance. These professionals have the expertise to help you understand your options, negotiate with the IRS, and ensure you’re taking the correct steps to resolve your tax debt.
8. Look for Specific Relief Programs
There are various relief programs tailored to different taxpayer needs. For example, the IRS often provides specific relief for taxpayers affected by disasters. Check the IRS website or consult a tax professional to determine if any current relief programs apply to your situation. Additionally, some taxpayers may qualify for temporary delay of collection if the IRS determines that paying your tax debt would prevent you from covering basic living expenses.
9. Adjust Withholding and Estimated Taxes
Once you’ve dealt with your current tax debt, it’s essential to avoid this predicament in the future. Adjust your withholding on your W-4 with your employer to ensure enough taxes are being withheld from your paycheck. If you’re self-employed or have other income sources, make sure to pay estimated taxes quarterly to avoid underpayment penalties.
FAQs
Q: What happens if I don’t pay my taxes?
A: If you don’t pay your taxes, you will incur penalties and interest on the unpaid balance. Continued nonpayment can lead to severe consequences, including wage garnishments, bank levies, and liens on your property. In extreme cases, the IRS can pursue legal actions that could result in imprisonment for tax evasion.
Q: Can the IRS take my house?
A: While it’s rare, the IRS does have the authority to place a lien on your property and, in some cases, seize and sell your home to pay your tax debt. However, this is usually a last resort after multiple attempts to collect the debt.
Q: What is a tax lien?
A: A tax lien is a legal claim by the government on your property due to unpaid taxes. It can affect your credit score and make it difficult to sell or refinance your assets.
Q: How do I know if I qualify for an Offer in Compromise?
A: Qualification for an Offer in Compromise depends on your ability to pay, income, expenses, and asset equity. The IRS provides a pre-qualifier tool on its website to help determine eligibility, but consulting a tax professional can also provide clarity.
Q: Are there any tax relief options for people impacted by COVID-19?
A: Yes, the IRS has introduced several relief measures for taxpayers affected by COVID-19. Check the IRS website for the latest information or consult a tax professional to see what options are available to you.
By confronting your tax debt directly and exploring these steps, you can take control of your financial situation and work towards resolving your tax obligations responsibly.
