What If You Owe Taxes, But Can’t Pay Your Tax Bill?

It’s a common problem around this time of year: you owe taxes but you can’t pay your tax bill. In the past, this was often due to unfortunate circumstances, say huge medical bills or the bankruptcy of a business. There is also the issue with of gig economy, where people may not have set aside enough money to pay their taxes — or may not have made enough to consider parting with any of it in the first place.

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In 2019, however, the recent tax cut has made owing taxes a problem for more Americans than ever before. Based on early data, the IRS estimates it will be paying out 26% fewer refunds than previous years and that about 3 million more Americans will owe taxes this year.

So what happens if you’re one of these people, and you can’t afford to pay your tax bill?

If you do run into trouble with paying taxes, a common reaction is to ignore the IRS notices. But this only delays the problem — and will mean higher interest costs and penalties. What’s more, if you do not file your returns as a result, the consequences can be severe. The penalty is as much as 25% of the unpaid balance.

In other words, the best approach is to be proactive about addressing your tax bill.

The good news is that there are various options available if you can’t pay the taxes you owe. Before you consider these, however, the first step is to look again at your tax return. Maybe you missed some deductions? Were there some errors? This is where it can be helpful to get the assistance of a tax pro.

But if after this you still have a tax debt, here are some actions you can take:

#1. File for a Payment Extension

The IRS allows for a 120-day delay for a payment of your taxes, so long as the amount is less than $100,000. There is no fee for this. All you have to do is fill out this form. But keep in mind that interest will continue to accrue including any penalties that are applicable.

#2. Set Up an Installment Agreement

If you need more than 120 days to pay off your tax debt, then you can set up an installment agreement with the IRS (you can go here for the application). This will involve making monthly payments on your bill.

If your tax debt is less than $10,000, then you should get automatic approval if the agreement calls for paying off the obligation within three years. But if this does not apply, then you might have to provide financial disclosures to the IRS.

To setup a payment plan, you will need to pay a fee, which can range from $31 to $225. You also must be current on all your tax filings. Furthermore, any future refunds will be applied to your outstanding tax debt.

What if you miss a payment? In this situation, your account may go into collections. So you should call the IRS to discuss your situation.

#3. File for “Offer In Compromise “or “Currently Not Collectible” Status

You’ve seen the TV commercials that make claims that they can greatly reduce or eliminate your tax debt. Yet you should not get too optimistic. It’s tough to qualify for the IRS programs.

The most common is the Offer In Compromise (OIC) status. To get this, you must provide full financial disclosures and you’ll also be required to live on a strict budget. The form is also fairly complicated so you should get the help of a tax pro.

Then there is something called “currently not collectible status.” With this, your financial situation is so dire that the IRS will not pursue the case. Yet the agency will review your case every couple years to see if your financial situation has improved.

#4. Use a Credit Cards or Personal Loan

It’s easy nowadays to use your credit card to pay off your tax debt (and hey, it may mean more reward points!) But after interest, it may be more cost effective to use an IRS installment agreement.

Next, you can look at getting a personal loan from friends or family — which will likely mean paying much less in interest. But of course, this could lead to thorny issues if you cannot pay back the loan.

And finally, you can take out a loan from your 401(k). However, there are some limitations. For example, the total amount you can borrow is 50% of the account value or $50,000, whichever is higher. Plus, the loan will have interest charges and a term of up to 5 years. Oh, and if you cannot pay back the loan, it will likely mean paying taxes on the net amount and a 10% penalty.

Tom Taulli is an Enrolled Agent and also operates PathwayTax.com, which is a tax advisory and preparation firm. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2019/03/what-if-you-owe-taxes-but-cant-pay-your-tax-bill/.

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