If you can’t pay your taxes, you are not alone. While 3 out of 4 American taxpayers receive a refund each year, there are those who for one reason or another end up owing. Of those who owe Uncle Sam, many don’t have the means to pay. But not paying is a horrible idea. Instead here are some ways so that you CAN pay what you owe by the return due date in April.
NOTE: If you live in a federally declared disaster area the due date may have been automatically extended. The extension will apply if you reside in the disaster area, and you need not be directly affected by the disaster to qualify. Check the IRS website at Tax Disaster Relief Situations for areas that have disaster filing relief extensions. For example, taxpayers in most of California and parts of Alabama and Georgia now have until Oct. 16, 2023 to file and pay various federal individual and business tax returns. Check the IRS website to confirm you qualify and for information related to state disaster relief due date postponements.
Generally, one owes taxes when a wage earner has under-withheld on his or her payroll. Another reason could be that a self-employed individual failed to make adequate estimated tax payments during the year. This can be a huge problem for those who are unable to pay their liability. (And why we stress the critical nature of making your quarterly estimated tax payments to business owners!)
It is always in your best interest to ensure that you can pay your 2022 taxes rather than be subjected to penalties and interest for payments made after April 18, 2023.
However, if you can’t pay your taxes, here are a few options to consider.
Family Loan
Obtaining a loan from a relative or friend may be the best bet because this type of loan is generally the least costly in terms of interest.
Home Equity Loans and HELOCs
Use the equity in your home—that is, the difference between your home’s value and your mortgage balance—as collateral. As the loans are secured against the equity value of your home, home equity loans offer extremely competitive interest rates—usually close to those of first mortgages. Compared with unsecured borrowing sources, such as credit cards, you’ll be paying less in financing fees for the same loan amount. Unfortunately, obtaining these loans takes time, so if you anticipate that you’ll need funds from such a loan to pay your taxes that are due in April, you should get the application process started right away.
If you Can’t Pay Taxes, an Expensive Option Is To Use a Credit Card
Another option is to pay by credit card with one of the service providers that work with the IRS. However, since the IRS will not pay a credit card discount fee (the fee charged by the credit card company), you will have to pay the fees due and pay the higher credit card interest rates.
Short-Term Payment Plan
If you can fully pay the tax owed within 180 days and owe less than $100,000 including tax, penalties, and interest, you can apply for a short-term payment plan online at the IRS web site. You won’t be charged a set-up fee but will still have to pay penalties and interest until the balance owed is fully paid.Set-up fees will be charged if you apply for a payment plan by phone, mail, or in person instead of online.
IRS Installment Agreement
If you owe the IRS $50,000 or less, you may qualify for a streamlined installment agreement. This agreement is where you can make monthly payments for up to six years. You will still be subject to the late payment penalty, but it will be reduced by half. Interest will also be charged at the current rate. There is a user fee to set up the payment plan. However, the IRS generally waives the fee for low-income taxpayers who agree to make electronic debit payments. In making the agreement, a taxpayer agrees to keep all future years’ tax obligations current.
However, beware. If the taxpayer does not make payments on time or has an outstanding past due amount in a future year, they will be in default of their agreement. In that case, the IRS has the option of taking enforcement actions to collect the entire amount owed. Taxpayers seeking installment agreements exceeding $50,000 will need to validate their financial condition. They will need to provide the IRS with a Collection Information Statement (financial statements). Taxpayers may also pay down their balance due to $50,000 or less to take advantage of the streamlined option.
If you can’t pay, One of the Worse Options is to Tap a Retirement Account
This is possibly the worst option to pay your taxes. Why? Because by doing so, you are jeopardizing your retirement lifestyle. Also the distributions are generally taxable at your highest bracket, which adds more taxes to your existing problem. In addition, if you are under age 59 ½, the withdrawal is also subject to a 10% early withdrawal penalty. Which compounds the problem even further.
Filing Extensions Is NOT an Option if You Can’t Pay Your Taxes
Don’t mistake the ability to apply for an extension of time to file your tax return as also being an extension to pay any tax liability. It is not and does not grant you an extension of time to pay. The penalties and interest on the amount due will continue to apply as of the original due date of the return.
Enforced Collections
If the taxes cannot be paid timely, and the IRS is not notified why the taxes cannot be paid, the law requires that enforcement action be taken, which could include the following:
- Issuing a Notice of Levy on salary and other income, bank accounts or property (IRS can legally seize property to satisfy the tax debt).
- Assessing a Trust Fund Recovery Penalty for certain unpaid employment taxes.
- Issuing a Summons to the taxpayer or third parties to secure information to prepare unfiled tax returns or determine the taxpayer’s ability to pay.
Note: To collect delinquent tax debts, certain federal payments (vendor, OPM, SSA, federal salary, and federal employee travel) disbursed by the Department of the Treasury, Bureau of Fiscal Service (BFS) may be subject to a levy through the Federal Payment Levy Program (FPLP).
Fresh Start Initiative
The IRS also has what is called the “Fresh Start” initiative. This initiave offers more flexible terms in its existing Offer-in-Compromise program. Under certain circumstances, the program allows taxpayers to settle their tax debt for reduced amounts. This enables financially distressed taxpayers to clear up their tax problems faster than in the past. While resolving tax problems might previously have taken 4-5 years, taxpayers may now resolve problems in as little as two.
If you have questions about the payment options or an offer-in-compromise, please call this office for assistance. Don’t just ignore your tax liability, because that is the worst thing you can do.
Don’t Ignore Household Employee Payroll Tax Rules
