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 was due on January 16 — I still have a significant tax bill this year, thanks to increased income.
Many taxpayers dread filing their taxes, even if they receive a refund from the IRS. It’s often a time-consuming process that can be fairly stressful. Plus, pressing Submit on your electronic return (or licking the stamp of your paper return) can bring out fears and anxiety over the possibility of an audit, no matter how diligent you were about your records.
Some people, like me, have a stronger reason for the lack of anticipation: we will end up owing money. And for those who haven’t saved enough money throughout the year, this is a dreaded situation.
What 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, either, 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 tax debt.
Sometimes taxpayers receive a notification saying they owe money, but it 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.
Need More Time to File? How to Get an Extension on Your Taxes
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 is to avoid using a credit card to pay your debt, which would ordinarily be many consumers’ first choice. When you file your taxes, don’t pay online at that time if you can’t afford it in cash. Instead, wait until after you submit your form and it’s accepted by the IRS. Then, visit the IRS website to file an Online Payment Agreement.
If you take long enough, the IRS will send you a tax due notification, but there’s no need to wait for that to arrive. If you have your adjusted gross income (AGI) from your tax return, the amount you owe, and, of course, your Social Security number, you can get started. The form will first ask you how much you can pay and when you can pay it. Then, it will come up with a payment plan that works for you.
The payment plan will allow you to spread your tax bill out over a longer period of time. This improves the chances that paying your bill won’t cause you a financial hardship, and the IRS still manages to collect the monies due — a win-win in their book. There is a fee for creating a payment plan, ranging from $43 to to $225.
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 also file a federal tax lien, even if they delay collection. This means your property could become property of the government in order 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 — this will usually happen only in complicated situations — the IRS might consider an Offer in Compromise. Also, if you could afford your tax bill, but paying it would create a significant economic hardship, the IRS might consider an Offer in Compromise for you, as well. 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, the best solution is to pay the bill in full as soon as possible to reduce these extra costs, even if you agree to payment plans. I prefer the above options over other payment types (such as a high interest credit card) when cash isn’t available at the time the bill is due. However, 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 out 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.
Have you ended up with a big tax bill you couldn’t immediately pay? What was your plan of action?
Updated December 19, 2017 and originally published April 4, 2017.