It’s a good thing I’ve been saving a good portion of my income for the past year. Even with making estimated tax payments — the last of which is due on January 18 — I’ll have a significant tax bill this year thanks to increased income. Many taxpayers may not look forward to filing their taxes, even though they receive a refund from the IRS. Some, like me, have a stronger reason for the lack of anticipation: we will end up owing money. For those who haven’t saved money throughout the year for whatever reason, this is a dreaded situation.
What you can do if you can’t afford your tax bill
First of all, you don’t want to owe the IRS money. This type of debt is one of the hardest types to erase. There is no statute of limitations on IRS debt — so it won’t just go away on its own if ignored long enough. Even if you declare bankruptcy, it’s very difficult to get rid of IRS debt.
Sometimes taxpayers receive a notification that they owe money that might not be accurate. The IRS is a system subject to human error, just like any other agency. You can dispute the amount you owe if it doesn’t match your records and you have a reason to believe your calculation is correct.
The government is sensitive to the issue of whether you can afford to pay, so they’re willing to work with you a little bit. The best option avoids using your credit card to pay your debt, which would ordinarily be most consumers’ automatic choice. When you file your taxes, don’t pay online at that time if you can’t afford it. After you submit your form and it’s accepted by the IRS, visit the IRS website to file an Online Payment Agreement here.
If you wait, the IRS will send you a tax due notification, but there’s no need to wait. If you have your adjusted gross income from your tax return, the amount you owe, and of course your Social Security number, you can get started. The form will ask you how much you can pay and when you can pay it, and will come up with a payment plan that will work for you.
The payment plan will allow you to spread your tax bill out over a longer period of time, improving the chances that paying your bill won’t cause you a financial hardship and the IRS still manages to collect the bill. There is a fee for creating a payment plan, ranging from $43 to to $105.
If your financial hardship is only temporary, the IRS may delay collection, though interest and late fees will still be added to your bill. The IRS could, even if they delay collection, file a federal tax lien, which means your property could become property of the government to satisfy your debt.
The last line of negotiation with the IRS is an Offer in Compromise. There are only a few situations in which the IRS will accept a lower tax payment than what they believe is due. If the IRS believes you’ll never be able to satisfy your tax liability, but you agree to the amount you owe, an Offer in Compromise might satisfy the IRS. If there is legitimate doubt about the tax bill — and this will usually happen only in complicated situations — the IRS might consider an Offer in Compromise.
If you could afford your tax bill, but paying it would create a significant economic hardship, the IRS might also consider an Offer in Compromise. This is only in exceptional circumstances.
Because the IRS does charge you interest and penalties when you don’t pay in full or on time, even if you agree to payment plans, the best solution is to pay the bill in full as soon as possible to reduce these extra costs. I prefer the above options over other payment types when cash isn’t available at the time the bill is due, but the IRS offers these additional suggestions:
- Cash advances from credit cards
- Bank loans
- Taking cash out of your bank accounts and investments
- Borrowing from your 401(k)
- Cashing in your equity in an asset like your house
I’m not a big fan of any of these, but it is important to take care of your IRS debt above many other financial priorities.