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?