Can’t Pay Your Taxes? File Anyway

The tax deadline this year is April 18. But if you find that you owe and can't pay, don't bury your head in the sand by not filing. File your return on time, then check out these options for dealing with the debt.

Can’t Pay Your Taxes? File Anyway Photo (cc) by John-Morgan

Over 140 million individual income tax returns are filed every year – and every year, a quarter of Americans wait until the last minute. According to the IRS, only 82 million had filed as of March 25, and “20 to 25 percent of all taxpayers file in the final two weeks of the tax season.”

Some people are just procrastinators. Others are reluctant to file out of fear they owe money they don’t have. If you’re in the latter group, there’s a little good news: The filing deadline is not April 15 this year – it’s April 18, thanks to a D.C. holiday.

But if that three extra days isn’t enough to come up with the cash you need to pay what you owe, you should still file a tax return anyway. To hear why, watch the video below. Then read on for advice on how you can minimize the damage.

Not mentioned in the video above: It’s possible to avoid failure-to-file and failure-to-pay penalties if your excuse is good enough. According to the IRS website, “You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.”

But without a great excuse, not filing a tax return is a bad idea for at least two reasons. First, while rarely prosecuted except in extreme cases, it’s a crime. For those who owe, failure to file a federal tax return is a misdemeanor punishable by a maximum fine of $25,000 or one-year prison term. Second, not filing a tax return means a penalty of 5 percent of the taxes owed for every month or partial month the return is overdue, capped at 25 percent.

Filing a return without paying, on the other hand, has a much less expensive outcome. If you file but don’t pay, your penalty will generally be only half a percent a month. So if you owe $1,000, that’s only $5 a month vs. the $50 a month you’ll owe if you don’t file a return.

So what do you do if you can’t pay? Here’s some advice:

1. Borrow from uncle Joe to pay Uncle Sam. The best-case scenario when you owe money is to borrow with no interest. Try to work out an interest-free loan with your family, friends, or employer so you can pay your taxes in full on time.

2. Get a low-interest loan. See what options your bank has for personal loans, but also check with your local credit union, where rates may be lower. While the interest rates may not seem attractive, the combined cost is usually lower than the IRS penalties and fees.

3. Pay by credit card. In some cases, charging the debt might be the best solution, but it’s not the preferred one. You face a processing fee of 1.95-2.35 percent, along with any fees and interest your bank may charge. (In comparison, the processing fee for debit cards is about $4.) There are three companies the IRS uses to process credit card payments: Link2Gov, RBS WorldPay, and Official Payments Corporation. One small bright side to charging: If you itemize on your taxes, you may be able to deduct the convenience fee. The IRS says it’s “a miscellaneous itemized deduction on Form 1040, Schedule A, Itemized Deductions. The deduction is subject to the 2 percent limit.”

4. Use an IRS payment plan. As with anyone you owe money to, it never hurts to explain your situation. The IRS has been going easier on tax settlements during the recession – but you still need to talk to them.

If you can prove hardship, the IRS could delay collecting what you owe. But the penalties and interest on the taxes due will still be added to the debt. In addition, they may also file a Notice of Federal Tax Lien on your assets to protect Uncle Sam’s interests.

If you owe less than $25,000 and think you can pay off the debt within 120 days, the first option would be to apply for an Online Payment Agreement. If it’s going to take longer than that, you can get up to 60 months by filling out an Installment Agreement Request, form 9465 [PDF].

In addition to interest and penalties, installment agreements require a $52 or $102 fee, depending on whether payments are automatically deducted from your bank account. The IRS has examples of how the math works out, but these types of agreements tend to be the most expensive way to pay what you owe – and the most hassle.

One other option is an Offer in Compromise: an agreement where the IRS agrees to accept less than you owe. As you might expect, however, the IRS will only do one of these if they’re sure you have no hope of ever paying the full amount of taxes due.

The bottom line is you need to pay as much as you can as soon as you can.

We covered several other tax topics earlier this year: Check out 3 Tips for Free Tax Help, Avoiding 13 Common Mistakes, and if you’re lucky enough to get one, 10 Dumb Things to Do With Your Tax Refund.

Brandon Ballenger
Brandon Ballenger @btballenger
I'm a freelance journalist living in South Florida. If I'm not writing, I'm playing video games or at the beach. My favorite spice is oregano, and I thought you should know. I ... More

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