When tax time rolls around, you may be wondering, “what happens if I can’t afford my tax bill?” Perhaps you file on time but know you won’t be able to pay your bill in full. Or, maybe you weren’t expecting a tax bill at all and don’t have enough money saved to pay. If you can’t afford your tax bill, don’t panic. More than half of millennials don’t have $500 set aside for a tax bill, so you’re not alone. There’s a handful of options available to help you.
The most important thing you can do if you can’t afford your bill is to be proactive. Avoid waiting for the IRS to call, as the penalties and limitations may be much harsher. The IRS may be more likely to accommodate if you create a record of honest, dedicated communication.
How do I pay my tax bill off?
The due date for paying your 2019 taxes is the due date of your return, April 15, 2020. Even if you file for an extension, the IRS expects you to estimate the amount of tax due and pay your tax bill by April 15. If you file on time but do not pay timely, the IRS will charge you interest, currently a 5% annual rate (subject to change each quarter) on unpaid tax bills. In addition, you may be charged a 0.5% per month “failure to pay tax” penalty (maximum of 25%).
If you plan to pay the amount due in a few months, plan to file your return by the due date, figure out what you can afford to pay monthly and send the amount to the IRS until the tax, penalty, and interest are paid. Interest and penalties will still accrue, but there isn’t a fee or an approval application. Or else you can apply for an extension of time to file and save up the money so you can pay the entire balance when the return is filed, however interest and penalties will still accrue. Extensions are valid for 6 months after the original due date of your return. Make sure you file an extension by the due date of your return as there is a 5% per month penalty (maximum 25%) if you file your return late and owe the IRS.
You can limit the interest charges and late penalties by setting up a payment plan. If you owe less than $50,000, you can start the process yourself and set up a payment plan request online.
Setting up a long-term (120+ days) payment plan will cost $149, plus interest and penalty charges. It’s recommended to set up your monthly payments with an automatic debit, as the set- up fee is reduced and the chance of missing a payment is reduced. If you miss a payment on an installment plan, the IRS will send you a bill for the remaining amount owed which is due immediately. The IRS will inform you if your request was approved or denied in approximately 30 days.
Finally, treat your tax bill like any other type of debt. Pay off as much as you can each month, not just the minimum monthly payments. Until the debt is paid in full, the IRS may file a federal tax lien against you, which limits your ability to get a line of credit, purchase a house, or apply for a federal student loan.
What if I can’t pay at all?
If you’re unable to pay your tax bill as it comes due and you do not see yourself being able to pay the amount due at any time in the future, you may consider applying for an offer in compromise. An offer in compromise is a serious matter and requires the applicant to complete several forms providing detailed personal financial information regarding your income, expenses, assets, and liabilities. If the IRS accepts your offer, your tax due, penalties and interest may be reduced.
Due to other extenuating circumstances, plenty of taxpayers may still be unable to pay their tax bills. If you’re unable to pay due to disability or a circumstance completely out of your control, contact the IRS. If the IRS agrees you are unable to pay the debt, your account will be marked as Currently Not Collectible (CNC). Interest will accrue on your tax bill, however, the IRS will not try to collect or send collectors as long as you’re under CNC status.
How can I protect myself in the future?
If you’re not sure what you owe for a given tax year, you can use this tool created by the IRS to estimate your bill based on your income last year. Unfortunately, the tool will not help you prevent a large bill again next year. Find a tax expert who can understand where things went wrong, and he or she can help you avoid large tax bills in the future.
Other solutions can be setting aside income on a monthly basis from a side business or adjusting the withholding amounts on your paycheck. If you’re an independent contractor, it may be best for you to set aside a percentage of every paycheck. With the help of an expert, you can plan and save for your taxes and avoid unfortunate surprises the next time taxes are due.