What To Do When You Can’t Pay Your Taxes?

A common situation many taxpayers find themselves in is not being able to pay their taxes. Some taxpayers just know that they are going to owe so they don’t even bother to file their returns. BIG MISTAKE! Other taxpayers file their returns but are unable to pay in all thay they owe. Others receive notices from the IRS showing adjustments to the taxpayer’s and ask for additional payment.

So, what is one to do when one just doesn’t have the money to pay?

One of the first thing a taxpayer should do is make sure that all tax filing is up to date. The reason for this is that the late filing penalty is onerous. It can be up to as much as 25% of the tax due. This is one way taxpayers get into so much trouble with the IRS. With this kind of penalty plus late payment penalties and interest, a taxpayer can find himself owing much more than what was originally owed and what was a minor problem suddenly becomes a major problem.

The second thing that a taxpayer should do is play for time. Someone who hasn’t filed a return should file his return even if he can’t send in any payment.

The IRS will certainly bill the taxpayer, of course, but by the time the IRS bills the taxpayer, which could be six to eight weeks later, the taxpayer could have time to come up with the money.

The third option for the taxpayer if the taxpayer sees that he cannot come up with the whole amount in the foreseeable future is to request a payment plan from the IRS. Be aware though that the IRS charges a setup fee of $43.00 to set up a payment plan. Also, the IRS requires, while the payment plan is in effect, for all tax returns and all tax payments, such as estimated tax payments, to be filed on time. If not, the IRS will revoke the payment agreement and bill the taxpayer for the whole amount owed.

Another possible option for a taxpayer is to file an Offer In Compromise. This is an agreement where the IRS will let a taxpayer pay less than the amount he owes. But, filing an Offer In Compromise is complicated and the IRS seems to reject most that are filed. However, I will be writing more about the Offer In Compromise in future posts.

In conclusion, I just want to emphasize that owing money to the IRS is a very serious matter. The reason this is so serious is because the IRS can play very nasty with anyone who the IRS thinks they might not be able to collect from. The IRS has powers way beyond other creditors, such as being able to freeze bank accounts.