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What To Do If You Can’t Pay Your Taxes

By on April 23, 2012 in Tax

What To Do If You Can't Pay Your TaxesTax day is an unpleasant experience for many individual and business taxpayers that can’t afford to pay the taxes they owe the Internal Revenue Service. Other than ignoring the problem, what should you do?

Don’t Wait to File Your Taxes

The first critical thing to know if you can’t pay your taxes is you cannot wait to file your taxes. You absolutely must file your taxes by the tax deadline in order to avoid further penalties and fees. If you fail to file you will be assessed a penalty of 5% per month of the balance due. The fee caps out at 25%, but if you owe $1,000 you suddenly find yourself owing $1,250.

You still pay a penalty if you file but don’t pay your tax liability, but it is only 0.5% of the amount you owe. Where after 5 months of not filing you would owe $1,250 on a $1,000 tax liability, with the option of filing but not paying on time you would be at $1,025.

Don’t Ignore the Problem

Even if you do file your taxes but know you can’t afford to pay, you can’t cover your ears and close your eyes to avoid the problem forever. The IRS wants you to pay up. They will start firmly reminding you to pay up.

It doesn’t have to be this way. The IRS understands things happen and that even if you want to pay your tax liability you may not have the ability to pay it all at once. As with most organizations you owe money to that you can’t pay, communication is key. They would much rather hear from you to work something out than to assume you’re never going to pay and come after your assets to pay off the liability.

Installment Plans

You can set up a payment plan to pay your overdue taxes to the IRS. The interest and fees that you would normally incur for not paying off the full balance will still be incurred, but you’ll avoid the huge fees of not filing your taxes at all.

To set up an installment payment plan, the IRS will charge you a fee ranging from $43 (for some lower-income tax debtors) to $52 (if you agree for the balance to be debited automatically from your bank account) to $105 (if you want to send in checks to the IRS).

Another interesting fact: the IRS is required to accept an installment plan from you if you have consistently paid your taxes on time and your tax liability is less than $10,000 ($25,000 for business tax liability).

Negotiate for a Lower Amount Through a Tax Settlement

You can also negotiate a tax settlement with the IRS for the balance that is owed. The IRS is just like any other creditor: sending your debt off to collections is costly and annoying. Instead of writing off the debt or trying to collect on it, you can try to work out a settlement even if you make up to $100,000 per year. There is a $150 application fee to choose this option, and you need to be prepared to have your finances looked at in great detail by the IRS. They can always decide to not settle if you have enough assets to cover your liability. But if you don’t, you might get lucky and pay pennies on the dollar for your debt.

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