What If I Don’t Have Enough Money to Pay My Taxes?
Explore practical solutions and strategies for managing tax payments when funds are tight, including options for agreements and professional guidance.
Facing the prospect of not having enough money to pay your taxes can be overwhelming. This situation can impact individuals with unexpected expenses or businesses facing cash flow problems. Knowing the available solutions and potential consequences is crucial for managing this challenge effectively.
Filing for an Installment Agreement
If paying your taxes in full isn’t possible, consider an installment agreement with the Internal Revenue Service (IRS). This option lets you pay your tax debt over time. The IRS offers various installment plans, including a streamlined agreement for individuals owing $50,000 or less in combined tax, penalties, and interest. This can often be set up online.
To apply, file Form 9465, Installment Agreement Request, with the IRS. Ensure all tax returns are submitted before an agreement is approved. Taxpayers must also stay compliant by filing and paying future taxes on time while the agreement is active. Interest and penalties continue to accrue on the unpaid balance until fully paid, with the current interest rate at 3% per annum (compounded daily) and a failure-to-pay penalty of 0.5% per month, up to 25% of the unpaid taxes.
Requesting an Extension
If you can’t meet the tax payment deadline, requesting an extension may provide temporary relief. While an extension gives additional time to file your tax return, it does not extend the deadline to pay taxes owed. The IRS usually grants a six-month filing extension, which can be requested using Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.
Submit the extension request by the original filing deadline, typically April 15, to avoid late filing penalties. The late filing penalty is 5% of unpaid taxes for each month the return is late, up to 25%. Certain taxpayers, such as U.S. citizens living abroad or military members in combat zones, may qualify for an automatic extension without filing Form 4868.
Offer in Compromise
An Offer in Compromise (OIC) allows taxpayers to settle their tax debt for less than the full amount owed if specific criteria are met. The IRS evaluates OIC applications based on a taxpayer’s ability to pay, income, expenses, and asset equity, determining if full payment is unrealistic.
To qualify, applicants must demonstrate doubt as to liability, doubt as to collectibility, or effective tax administration. For example, doubt as to collectibility requires showing that financial circumstances make full payment unlikely. Applying involves submitting Form 656, Offer in Compromise, along with a $205 application fee and an initial payment. The IRS calculates acceptable offers using the taxpayer’s reasonable collection potential (RCP), which accounts for net equity in assets and future income.
Penalties and Interest
Tax penalties and interest can accumulate quickly if obligations aren’t met. Penalties often arise from late payments or underpayment of taxes, while interest accrues on both the tax owed and any penalties. The failure-to-pay penalty accrues monthly, emphasizing the importance of arranging payment plans promptly.
Interest is compounded daily and based on the federal short-term rate plus 3%, which adjusts quarterly. Paying as much as possible upfront can help reduce the overall cost of interest and penalties.
Consequences of Non-Payment
Failure to pay taxes can lead to serious consequences beyond financial penalties. The IRS has extensive authority to enforce collections, starting with notices and escalating to more severe actions if debts remain unresolved.
One potential consequence is a Notice of Federal Tax Lien, which secures the government’s interest in a taxpayer’s property and can negatively affect credit scores. If the debt remains unpaid, the IRS may issue a levy, allowing it to seize assets such as wages, bank accounts, or physical property.
In extreme cases, non-payment may lead to criminal charges, particularly if the IRS determines willful tax evasion. Convictions can result in fines, imprisonment, or both. Additionally, the IRS may revoke or deny passport renewals for individuals with unpaid tax debts exceeding $59,000.
When to Seek Professional Support
Navigating tax debt can be complex and may require professional expertise. Knowing when to seek help from tax professionals, such as Certified Public Accountants (CPAs), Enrolled Agents (EAs), or tax attorneys, can make a significant difference in resolving issues efficiently.
Professionals can be especially helpful with complex processes like Offers in Compromise, disputing liens or levies, or addressing audits and appeals. They bring a deep understanding of tax law, IRS procedures, and negotiation strategies, acting as intermediaries between taxpayers and the IRS. Seeking professional guidance early can prevent minor issues from escalating into severe financial or legal problems.