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What if I Can’t Pay My Income Taxes?

photo: imdb.com

photo: imdb.com

We are just over a month away from April 15th, when income taxes are due in the US. I have perhaps an unfounded fear of the Internal Revenue Service. I’ve never actually met anyone who worked there, and I have no reason to believe they are bad people, but they did get Al Capone. There has to be some merit to my fears. While thankfully I’ve never had to deal with this reality, I’ve often wondered, what happens if you can’t pay your income taxes?

I think my fear started the first year I owned a business. Before that, I got paychecks. Taxes were withheld. I filed returns, and usually got a tax refund. Buying a business flipped that all upside down. I did know that I needed to pay quarterly returns, but with everything else going on, I didn’t. The business also made a profit, which is wonderful, but it caused me to owe $20,000 in taxes that first year. After some careful repurposing of funds, we were able to pay the bill. That has been several years ago, but I still experience a weird state of mind during tax season. I always have a bit of panic until April 15th, wondering what would I do if I couldn’t pay my taxes?

ALWAYS File a Tax Return

If you know you can’t pay your taxes, you still have several steps to follow. The most important thing you can do is to file your return or apply for an extension. If you owe money that is not paid by tax day, it will accrue interest, but far less than the penalty for not filing a tax return. The failure to file penalty is 5% per month on the amount due, up to 25%, with a minimum of $135. In contrast, if you file but can’t pay, the penalty is 0.5% per month. You will still owe interest either way, but there is a huge difference between 0.5% and 5% in penalties.

Pay as Much of the Tax Bill as Possible

Even if you don’t have the full amount, you can still pay as much as possible. If you do file for a six month extension with Form 4868, as long as you have paid 90% of the taxes due, you won’t incur a late payment penalty. If you can’t pay that much, at least any payment lowers the penalties and interest you will accrue.

Do You Qualify as a Hardship Filer?

If you have had an undue hardship like losing a job, experiencing a natural disaster, or were on active duty military service, you could qualify for a Form 1127 extension. This is different than form 4868 because you would not have to pay any penalties, only interest, on tax money owed. You do have to provide detailed financial information and prove that you are unable to borrow the money to pay your taxes. It is subject to approval. You need to submit early, so don’t wait until 10 PM on April 15th to get started!

Should You Pay Taxes with a Loan or Credit Card?

The IRS does allow you to pay taxes with a credit card, BUT they cannot process the payment because they are not allowed to pay credit card fees. They get around this by using processing services that charge around 2% of the balance in fees. Considering that the interest rate on your credit card will likely be higher than Uncle Sam’s rate, if you don’t have a really good offer, like 0%, this might not be a great option. I understand the need to have the IRS off your back, but think rationally when you look at interest rates and fees.

I would never, ever take out a payday type loan to pay taxes.  It is guraranteed to cost more than other forms of payment. If you have a rich uncle who can lend you the money, take advantage. Do keep in mind that if a relative gives you a 0% loan, it is considered a gift, and any portion over $13,000 would be subject to taxes.  

Set up a Payment Plan with the IRS

If you owe less than $50,000 in income taxes, you can set up a payment plan through the IRS website by using Form 9465.  There is an application fee, and the IRS can always reject your payment plan, but generally, they want to get paid. Unless you are asking to pay over an inordinately long period of time, it is likely to be accepted. If you owe over $50,000 in taxes, you have to call to set up an installment plan.

Seek Help from a Tax Professional

If you need help, find a tax professional. I wouldn’t recommend the ones that set up a kiosk in Wal-Mart during tax season. Find a real, live CPA who can make sure your taxes are done correctly and help you with options for payments. It might cost a bit, but it removes the worry of filing the right forms and meeting all the deadlines. The IRS even has information on their website for free tax help if you qualify. Don’t stick your head in the sand!

What if I Don’t Ever Pay My Taxes?

Regardless of whether you agree with the tax code, you have to pay what you owe. The IRS has the ability to file federal tax liens against your propertry. They can levy assets against your bank accounts,  wages, social security benefits, and retirement income. They can also seize your real estate, cars, or boats with the purpose of selling to collect taxes owed. They will also take any future refunds you might receive.

In reality, I think the IRS just wants their money. If you are willing to find a way to pay them, they will work with you. Their website was actually really easy to navigate and use when I was doing research, and you can find many answers at irs.gov. That doesn’t mean I love the IRS. Even though Alcatraz is now a tourist stop, you won’t find me taking any chances by not paying my taxes!

Have you ever been in a situation where you couldn’t pay taxes?


About Kim Parr

Kim Parr is a private practice optometrist, freelance writer, and personal financial blogger. You can follow her journey to 20/20 financial vision at Eyes on the Dollar.

57 comments

  1. I’ve got to admit – this was the first year I was afraid to file my taxes too. I’m still employed, but the complications of blog income being considered somewhat self employment income added a whole layer of uncertainty. I’d be even more unsure if I was completely self employed. I think I’d have to rely on a tax professional in that case. It would probably be money well spent.

    • It’s really sad when pretty educated people can’t figure out all the tax rules. I certainly wish it was more simple.

  2. The IRS has ridiculous powers when it comes to getting their (?)money. As I understand it, They can put a lien on and seize your home without due process or a court order. Worse I believe they can do so for piddling sums. Believe it or not, they do have a taxpayers advocacy office which can help taxpayers resolve issues that may not be their fault. Me ex-mother inlaw was getting ready to lose her house due to a deceased husband that had cheated on his taxes for years and filed jointly with her (she had no income herself). It took two phone calls and one letter and they forgave her the entire debt and lifted the lien. YES, I was shocked beyond belief but pleased! Mmmm, this might be a good topic for an article 😀

    • This is not quite right. The IRS does have the ability to put a lien on personal property because of nonpayment – but that is after months of the IRS warning the taxpayer about the possibility and the taxpayer doing nothing. There are options if you cannot pay your debt in full, and the moment that a taxpayer’s application for one of those is received, the IRS is stopped from going any further with their lien/seizure procedure.

      • Yes, I believe the IRS does want to work with taxpayers, but they do have the option to seize personal property if you do nothing. I believe it takes a long time, but they do come after you. I have a friend who didn’t file a return for 7 years and at year seven they drained all of her accounts and have been very aggressive since then. Granted it was really dumb not to file for that long, but she is really regretting it now.

    • That’s great for your mother in law! From what I’ve gathered, they reserve the right to seize property only for those who take no steps to resolve tax issues and it takes a really long time. My friend had her bank accounts seized, but it was 7 year after the fact.

  3. I’m not sure what it is like in the US, but in Australia if you don’t pay your taxes you can go to jail.

    I so hate paying tax 🙁

    • I think it would have to be pretty extreme to end up in jail, like for known evasion. Mostly if you do nothing, they will seize your assets, but it takes a very long time. I’ve never heard of non-criminals going to jail over taxes in the US.

  4. I was regularly in this situation early in my career (I knew nothing about taxes back in the mid 90s….huge learning curve). After a few years and tons of penalties, I did the smart thing: found a good accountant who helped me put together a real plan (not one of these firms who advertise on television….but real help) and went on the attack. It wasn’t pretty and took years to climb out of the hole, but getting out of that debt was one of the biggest accomplishments (and learnings) of my life.

  5. I can definitely relate to hating paying taxes. This is even more true now that we have to send off those lovely quarterly payments. I know it means we made money, but the amount we send off is just crazy ridiculous. This is all part of the reason why we hired a CPA last year, so I don’t make some stupid mistake that costs us boatloads of money.

  6. I’ve always found the IRS to be fairly easy to work with. It can be annoying at times, but the customer service is pretty good. I agree that the most important thing is to file and seek a extension. Not doing anything will hammer you hard!

  7. I recently got caught back up after owing the IRS money for the past few years. I found that they were at least reasonable to deal with provided you gave them an update on your situation and let them know when to expect their money. Being transparent and honest can go a long way.

    • From what I can gather from reading and from people I’ve spoken with, they do seem to want to work with you if you are doing your part.

  8. I have my own business and it’s SUCH a huge pain to do taxes. I need to carve out an entire weekend just to organize things for my accountant. I’ve never been in a situation where I couldn’t afford to pay, mainly because my business makes so little money…and I have a very good accountant. Er, I think. I hope. I till fear the IRS and hope to god I never get audited.

    • I am terrified of an audit, but I’m sure it isn’t as bad as it sounds. As long as I have a business, I do want the CPA to do my taxes for that very reason.

  9. It is always important to pay your taxes or work with the IRS to get them paid. They are usually pretty lenient when you work with them, but if you just choose not to pay, then that is when the trouble begins.

    • That was what I found. They seem to have a variety of options to help you out if you are willing to do your part and get everything filed on time.

  10. Great info, Kim! That’s kinda sad that the IRS lets people pay with credit cards. It just goes to show how messed up we are as a nation =/ But I guess that’s better than not getting paid at all!

  11. A few myth-busters for everyone:

    The IRS isn’t some gestapo group looking to trample the little people. We all owe our fair share of taxes, and the IRS only seeks to take that which is owed. Sure there are penalties and interest, but who doesn’t pay fees for not making their payments on time to a creditor?

    Anyone can put a lien on an individual for monies owed, so the IRS isn’t doing anything extraordinary there. People have liens for judgement placed on them all the time for non-payment to a variety of vendors.

    The IRS is very willing to work with you as long as you show that you have an interest in working with them as well. If you have cause, they are more than willing to give you a stay on any adverse actions planned against you. But if you try to screw with the service, or fail to live up to your end of the bargain, then all bets are off.

    The credit card payment issue–I’ll leave that one alone. Everyone is entitled to their opinions…

    • Thanks for the insights. It does seem that they give you every chance to do your part. They are just doing their job. It’s the politicians who determine the taxes, not the IRS.

      • I think people seem to get riled up over taxes because they don’t fully understand it. It’s the same thing people who are different–they are always the enemy until a better understanding is reached. And yes, it’s the politicians who set the tax rates, but even then people can’t get too worked up over it. After all, without taxes how would roads and schools and public service personnel, and the people who defend the freedoms (like the right to trash the IRS and politicians) get built or paid?

        What I would fully support is a group who challenge congress for answers as to why things take until the very last second to get accomplished. And why it is that THEY should get the Christmas break off right before the fiscal cliff bs while the people who they are supposed to be serving are still slogging through each of those days.

  12. I had a neighbor who was a former IRS prosecutor. He used to tell me stories about catching the big time criminals. I called him the night before I had a routine audit. He told me I should only worry when 2 guys come to your office with gold badges and guns. That is who he would send when it was serious. Like any debt, taxes need to be paid. The IRS is reasonable, but you should always use a third party (CPA)to negotiate.

  13. Your system of taxes witheld is really good, in France you pay taxes in September for what you earned the previous year, and it is usually about a month’s salary or two. Many people have spent it by the time it comes due. I keep an account with that money and try my best not to touch it.

    • You are about the only person I’ve ever heard who says out tax system is good! I guess we should all view it from other points of view and maybe we’d appreciate it a bit more? That’s a hard sale, though.

  14. Great list, Kim. I have been a big proponent of tax reform for a while now, mainly because of how complicated it is. Granted there is software that helps nowadays (a great result of a capitalist society), but overall it does need to be drastically simplified.

  15. Great post, Kim. I don’t think anyone ever wants to catch the attention of the IRS. 🙂 I just spent several hours last week getting everything ready to meet with my CPA. It has been my impression too that, even though we fear the IRS, they are generally willing to work with you as long you are willing to work them.

  16. Last year was pretty scary. I did my taxes and discovered that we owed $500. This was right as we were trying to buy a house. It was decided that we would use my money from donating plasma to pay the tax bill, but then three weeks into the year, I got deferred for 8 weeks because my line got clogged and I couldn’t get my red blood cells back. I finally came up with the necessary funds on April 13.

    • Way to come in there at the last minute. I always wonder about those people who are heading to the mailbox at 11:59 on April 15th, but maybe they were holding out for the last paycheck!

  17. We’ve had to defer our taxes once, a couple of years ago and everything worked out. The IRS worked with us and it turned out fine, thank goodness!

  18. I’ll be filing our taxes on my own for the first time this year. I’m a bit nervous but I have some life lines to call just in case. I’m sure I’ll be paying this year but I already knew that. So if I have to then more comes out of our savings. I try to make sure I invest enough or pay enough taxes through the year to come out even. That’s all that matters to me. Cheers!

  19. Paying taxes is no fun, but tax evasion is a serious offense and you don’t want to tango with the IRS that way. Great considerations in this post.

  20. Great points, just went to the tax man last week, it seems there is a delay on refunds because of the debt ceiling issue that took place at the beginning of the year. Supposed to be resolved in early March.

  21. I haven’t been in this situation, but my parents have. It is not a fun experience. Luckily, they only owed a few hundred, so I was able to cover it for them. :p

  22. Great tips, Kim! We had to work with them once due to a filing mistake for one of our businesses, and the people we worked with were all very patient and nice. I agree- it seemed they just wanted their money and didn’t want any trouble. They were very willing to work with us to resolve the situation.

  23. Great post! I know of several grad students (not only first-years) who have been blindsided that they are supposed to pay income tax on their stipends. I’m sure for some it will be difficult to come up with the lump sum so a post like this would be very helpful.

    I’ve called the IRS with questions several times and have always found their customer service reps to be friendly, if not competent.

  24. This is one thing I won’t mess with–I always, always take care of my tax obligations. I’m too scared of the consequences not to!

  25. I can understand how it could get really stressful if tax time comes around and you just don’t have the funds to pay for it. That’s why the best solution is to be prepared and save enough for any surprise money you may owe I think.

  26. I’ve got a bit of an IRS fear. We don’t lie on our taxes, but I’m a bit afraid that we forgot to move a decimal or put too many zeros.

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