What If You Can’t Pay Your Taxes?
Though some people might dread the idea of filing their taxes, everyone loves the idea of getting money back from the government. Most Americans can expect to get a tax refund, and even count on receiving this annual windfall from the IRS to make big-ticket purchases. That’s why it can be so disappointing to find out you have to pay when you file your return.
Owing money at the tax deadline is a particular challenge for solopreneurs, freelancers and gig workers, who often have inconsistent monthly incomes and may underestimate how much they owe the IRS in quarterly tax payments. Here are your options if your tax bill turns out to be more than you can afford.
What to Do If You Can’t Pay Your Taxes
First, it’s crucial to file your return by the due date and pay as much as you can. Otherwise, the IRS can charge you a Failure to File or Failure to Pay penalty, which are percentages of the taxes you didn’t pay on time. These penalties can add up quickly, compounding your financial difficulties.
While everyone’s tax situation is different, and there is no one-size-fits-all strategy, here’s a breakdown of your options.
1. Get on a Monthly Installment Plan
If you’ve fallen behind on your taxes, but feel confident you can eventually get back on track, an installment plan might be your most appealing choice. After you file your electronic tax return, fill out an online payment agreement application on the IRS website, or mail in your taxes and attach Form 9465.
If the IRS approves your application, you will have 72 months to pay your bill if you owe $50,000 or less in combined taxes, penalties and interest.
Remember, while you’re paying your overdue taxes on a monthly installment plan, you still need to make payments on the current year, so you don’t keep falling behind.
2. Request an Offer in Compromise
What if you can’t come up with the money to pay your taxes, even on an installment plan? The IRS allows taxpayers to apply for an offer in compromise, which is an agreement to settle your tax debt for less than the full amount you owe. It may be a reasonable solution if you have limited assets and can’t pay your full tax liability, or if doing so would create an undue financial hardship.
When deciding whether to approve your application for an offer in compromise, the IRS will evaluate your ability to pay, income, expenses and asset equity. If the IRS accepts your application, you will generally pay 20% of your offer upfront and the rest through installments. However, if the agency decides you can pay within the statute of limitations – generally 10 years – they likely won’t accept an offer in compromise.
Get a Clear View of Your Future
If you owe the IRS more than you can afford to pay, our responsive, knowledgeable team is here to help you. Taxes can be complicated, and every taxpayer’s circumstances are different, so you should consult our tax professionals for personalized advice. We’re passionate about helping entrepreneurs and small business owners make wise financial decisions, including tax-saving strategies.