It can happen to anyone — you complete your tax return and realize you can’t afford to pay your taxes in full this year. While this can be alarming, it’s important to remember that if you can’t pay your taxes, you likely have a few options to consider.
First, remember to keep a clear head. When you’re able to take a calm, holistic look at your tax situation, you will be better prepared to understand and process your options.
If you can’t pay your taxes and fear you might have late or unpaid taxes this year, you’re not alone. Millions of taxpayers find themselves in the same boat every year. We’re here to help with a list of things to think about and some action steps you can take.
First – How Did You Get Here?
In many cases, an unexpected tax bill is the result of a life change during the year. Perhaps you’ve started a new job, have a new source of income, or have inherited funds. Each of these scenarios will bump your income higher than usual, leaving you with a higher, and unusual, tax burden.
Even if you’ve not had a bump in income, you may, for one reason or another have not had enough tax removed at the source, leaving you with a tax burden. In this case, your employer has not taken enough tax from your paycheck to cover your annual taxes due.
In another scenario, you may be a self employed freelance independent contractor, with little to no tax paid throughout the year. When it comes time to calculate your taxes owed, it may come as a shock, if you haven’t set money aside.
If you can’t pay your taxes, or you have unpaid taxes owing, you most likely fall into one of these categories or a similar scenario. So, what do you do now? The answer depends on whether you need a short term extension of time to pay or a longer payment plan.
Why It Is Important to Act
While some financial decisions can be delayed, if you’re about to have late or unpaid taxes, you need to act quickly to avoid accruing interest and/or penalties on outstanding amounts.
When the Internal Revenue Service (IRS) has the sense that you have a plan, and that you’re working on clearing your late or unpaid taxes, it will likely be more lenient than if you ignore the tax problem or delay excessively. Over time, the IRS could garnish your wages or put a lien on your property. In extreme cases, you could even face jail time.
The key takeaway? File your tax return on time, even if you can’t pay your taxes owed at the time. This will avoid failure-to-file penalties; from here, you can figure out the best way to make good on your outstanding tax liability and keep the IRS at bay.
When You Need a Little More Time
If you realize you can’t pay your taxes in full by the due date but feel confident you can pay them with just a little more time, you have a few options. First, be sure to file your taxes on time and pay as much as you can toward your overall bill.
From here, you have a few options to cover your unpaid taxes:
- Apply for an extension — U.S. taxpayers can ask the IRS for an extension to pay their taxes when they use Form 4868, which is an application for an automatic extension of time, up to six months. The caveat is that you must make a payment of at least part of the amount you owe, and that interest and late fees will be applied to your outstanding taxes owing.
- Use your own credit system — if you have room on your credit card or line of credit, this may be the perfect time to use it. Of course, personal credit can come at a steep cost. Make sure you have a realistic plan to tackle these payments quickly, to avoid heavy interest charges.
- Arrange for a payment plan with the IRS — depending on your situation, if you can’t pay your taxes at the moment, but can pay them steadily, over time, you may be able to set up a payment plan, such as an installment agreement. Keep in mind, some of these plans are straightforward, while others require more complicated agreements.
While each of these payment alternatives has pros and cons, it is easy to see why they can be appealing for those who need just a little wiggle room on their timelines when taxes are due.
When Things Can’t Be Solved Quickly
Sometimes life needs more than a quick fix. When you know you can’t pay your taxes and that an extension or payment plan won’t help, you’ll need to consider other options.
Here are a couple of options for those who need a bigger solution:
- Currently Not Collectible (CNC) status — if the IRS reviews your financial situation and determines you can’t pay your taxes (if the payment would compromise your ability to afford day-to-day life), you may qualify for this deferred payment option, a temporary reprieve from paying your tax bill. Keep in mind, penalties and interest will continue to accrue on your outstanding balance. Further, if you request CNC status and owe more than $10,000, it is likely the IRS could file a tax lien, as a matter of public record.
- Offer in Compromise (OIC) — if you qualify for this settlement option, you could negotiate with the IRS to pay a smaller amount than you ultimately owe. This solution is often used when a taxpayer has few or no assets that could be sold and when a tax bill would impact their ability to afford day-to-day expenses or if paying the bill would cause financial hardship.
No matter which solution you use — if you spread out tax payments, defer them until later or settle on a lower amount — it is important to understand your eligibility, as well as the pros and cons of each option. For the best possible outcome and your peace of mind, be sure to enlist a highly qualified team of tax experts.
At Franskoviak Tax Solutions, we have helped thousands of clients with tax planning for more than 30 years. We provide comprehensive tax services with first-class expertise and a personalized, boutique-style approach. Speak to our team about personal and business taxes, payroll taxes, IRS tax relief, and tax problems such as IRS tax notifications, payroll tax debt, delinquent taxes, and more.
Start with a free consultation—if you’re feeling overwhelmed and can’t pay your taxes, we’re here to help.