Looking at a tax bill that you can’t afford and wondering what to do? In this post, we’ll lay out your smartest course of action for minimizing the damage.
Step 1: File your return on time
The biggest mistake you can make when you can’t pay your taxes on time is failing to file your return by the deadline. This is because there are two separate penalties for failing to file and failing to pay.
And believe it or not, the penalty for failing to file is 10x higher!
So, always file your completed return or an extension by the deadline.
Note: Filing an extension does not extend the due date for payment. Only for filing.
Step 2: Pay as much as you can afford
Most taxpayers don’t know that you can make a partial payment on your tax bill to reduce the amount you will owe in penalties and fees. Pay what you can today so that your outstanding balance is lower.
Step 3: Set up a payment plan with the IRS
There are two types of payment plans you can set up to pay your tax bill over time. Direct withdrawal payments are available to reduce fees and simplify the process.
- A short-term payment plan allows you to pay up to $100,000 with zero fee, as long as the bill is paid in less than six months. (Interest payments apply)
- A long-term payment plan can be arranged to spread payments out up to a maximum of ten years.
Short-term payment plans under $100k and long-term payment plans under $50k can be applied for online. Otherwise a petition must be submitted via fax or you will need to call the IRS to speak with an agent.
Visit irs.gov/payments to apply for a payment plan.
Understanding late payment and late filing penalties
- The penalty for late payment is 0.5% per month of your outstanding tax bill.
- The penalty for failure to file is 5% per month of your total tax bill.
Note: Both penalties max out at 25% of your total tax bill.
Warning: Do not ignore IRS notifications
If you receive a notification from the IRS regarding unpaid back taxes, always respond to the letter – particularly any notice that arrives via certified mail. Ignoring notifications will be treated as refusal to pay and the IRS may take immediate action against you.
Understand that unlike other creditors, the IRS does not require a court order to garnish your wages or pull money from your bank account as long as they have provided notice of their intended actions. The IRS can also issue a federal tax lien against you. This is why setting up a payment plan as soon as you know you cannot afford to pay is vital.
