What to Do If You Can’t Pay Your Taxes
The payment deadline may have shifted, but taxes are still due eventually—here’s what to do if you’re going to have a hard time paying your tax bill.
Whether you've had a tough year personally or you're one of millions impacted by the pandemic, paying owed taxes this year could be quite the burden. If you find yourself owing more than you're currently able to pay—remember, unemployment benefits are taxable on your 2020 taxes, though the American Rescue Plan allows up to the first $10,200 of benefits to be tax-free for those that certain income levels—don't stress. These tax experts have advice on how to navigate the situation without facing penalties for the 2021 tax season and beyond.
Face the problem head on
You’ve filed your taxes and instead of the sizable return you hoped for, you’re facing a major tax bill. What to do? First, don’t ignore the problem. Many people who find themselves in debt compound their woes by avoiding the situation, unaware of their options. But help is out there.
“When you owe taxes, the [Internal Revenue Service, or IRS] provides so many options for ways you can pay your taxes,” says Alex Oware, a tax expert with JustAnswer, an expert-connection site. “Even if you cannot pay, just call the IRS and work out a plan.”
If you wait, the IRS will eventually begin to contact you by mail. Oware says the first letter will typically arrive by snail mail within 30 days of the filing deadline, alerting you to the problem.
You’ll get increasingly serious correspondence from there, warning you of potential consequences until they finally take action. The IRS has the ability to garnish your wages, levy your accounts, and take whatever money they need to apply toward your debt. They’re also able to place a lien on your home, a legal action that can have lasting consequences.
“They can also revoke your passport, to the extent that you cannot travel outside the country,” Oware says.
While it’s rare, folks who don’t pay the IRS what they owe can and have been arrested. Of course, the more egregious cases usually involve some type of fraud, Oware says.
But don’t fret. These outcomes are worst-case scenarios, and there are plenty of options to investigate before they occur.
“The worst thing you can do when it comes to filing your taxes is nothing. Your tax bill—and the IRS—won’t magically disappear,” says Colleen McCreary, chief people officer and financial advocate at financial services site Credit Karma. “Be proactive for you and your money so you aren’t dealing with unnecessary fees and interest charges down the road.”
Sign up for a payment plan
Oware says the easiest option for paying your taxes is to agree to a payment plan with the IRS. Because it’s commonly used, you can typically apply for this arrangement online. If you have questions, call your tax accountant first.
“It’s really simple,” Oware says. “You basically figure out what to pay on a monthly basis and how to spread it out.”
Folks who owe less than $25,000 can fill out an online form. If you owe more than $25,000, there’s a little more work to do to arrange the payment plan. This option is typically called a streamlined installment agreement.
These agreements allow you to stretch payments for up to 72 months. Keep in mind that you’ll still have to file and pay taxes for each of the years following, even while you’re currently paying down the debt.
If you suddenly come into some money and want to wipe the slate clean, Oware says you can always pay your remaining debt off in a lump sum.
What’s the catch? You’ll owe interest on your payments if you opt for paying in installations.
“When you don’t pay taxes by April 15 [or the tax-filing deadline], it’s almost as if the government is giving you a loan,” Oware says. “So you have to pay interest on any balance that remains on your account.”
See if you qualify for forgiveness or suspension of collections
If paying one more monthly bill isn’t an option, there are some other ways to get square with the IRS, but each has a higher threshold for what you’ll need to prove.
The first option, Oware explains, is to ask the IRS to suspend collections from you. In order to do so, you’ll have to provide a financial statement proving that you cannot pay what’s owed. When the IRS agrees to put your account in a non-collectible status, it could be for any period of time to allow you to recover from a financial hardship. In most cases, you will eventually owe the money, but in the meantime, the IRS is agreeing not to pursue legal action or harass you with attempts to collect.
“If you thought you would have the money to pay your taxes, but you end up not having enough to pay, you can always call and ask the IRS for a delay in collection, or ask for a reassessment of your tax debt, etc.,” McCreary says. “There’s no harm in explaining your current situation and seeing if you can get a delay on repayment or have your tax debt reassessed.”
If you’re in a true pinch, you could have some of what you owe forgiven. Oware says most taxpayers will not qualify for this option, but it’s worth looking into.
“If you establish an extreme hardship, they will work with you and provide you an offer,” Oware says. “Say you owe $10,000, but they look at your hardship, and they’ll say, ‘We can accept $5,000.’”
McCreary points out, “This is normally a good option for taxpayers who have little in the way of assets and/or income”
RELATED: How to Negotiate With the IRS
How to actually pay
Once you’re ready to pay, you can do so through the IRS website either with a credit or debit card or directly.
If you pay with credit, McCreary cautions that there could be processing fees. If you want to avoid those fees, opt for wiring the funds instead.
“You can also pay your taxes with Direct Pay, which is linked to your bank account, the EFTPS, or the Electronic Federal Tax Payment System, same-day wire, check, debit card, or cash,” McCreary says.