Tax season is upon us, and if you’re already worried about paying your tax bill, you’re not alone. If you know that you won’t be able to afford all that you owe the government this April, there are a few steps you can take both before and after the date passes. Read on and find which payment route will be most useful for your purposes.
Don’t Avoid Filing
Even if you know you won’t be able to pay your taxes, you still need to file them—this year’s deadline falls on Monday, April 18, 2016. That may sound like a lifetime away right now, but it will be upon us before you know it. The IRS doesn’t take kindly to late filers—they can charge a penalty fee up to a maximum of 25% for the total cost of your debt if it isn’t filed within five months; this doesn’t even include the interest that your debt will accrue over time. Filing by the deadline will help you avoid the penalty fee, even if you can’t pay what you owe, and it will also help you stay on the IRS’s good side.
Consider Using a Credit Card
While it’s not always advisable to pay off one debt by creating another, using a credit card to pay off your taxes might be the lesser of two evils. The interest rate on your credit card may well be lower than the penalty that the IRS will charge on your debt—a half a percent per month, to a maximum of 25% after 50 months. Even making just a partial payment with your credit card can help you avoid devastating IRS interest costs. There is a fee to use a credit card with one of the IRS-approved processors, so be sure to do the math—add your card interest rate and the processing rate together and determine if that will cost you less than the interest rate charged by the IRS.
Request an Installment Agreement
If you can’t pay it all right now, ask the IRS to consider giving you an installment agreement. If your debt is less than $50,000 (combining taxes, interest, and any penalties), you’re likely to secure an installment payment plan simply by asking online. The most lenient of these plans will give you up to 72 months to pay back what you owe. This is only applicable to those taxpayers who are up to date on all past due tax returns. If your debt is above this threshold, you’ll need to negotiate, and a tax professional would be able to help increase your likelihood of IRS acceptance. Installment plans aren’t without their caveats—penalty fees and interest will still accrue on your balance as long as you’re making payments.
Resolve Debt with Offer in Compromise
If you have filed but can’t pay, consider an offer in compromise. This is a “something is better than nothing” situation, at least for the IRS. If they see that you will never be able to pay the debt owed, or that it is highly unlikely, they may compromise with you and reduce your debt to something more manageable. It’s rare that an OIC is accepted, and you must convince the IRS that you can’t pay the full amount, you suspect the amount of your tax liability is incorrect, or that paying your debt would cause unwarranted economic hardship. These offers can be very difficult to apply for, as there are many stipulations that you must meet before the IRS will accept an offer. If you do choose to try this route to settle your debts, use the help of a professional from a site like Community Tax to ensure the best chance of success.
Ask for an Extension
Undue hardship extensions are also rare, but they do happen. If the IRS deems that paying off your debt would cause an undue financial struggle, they will consider giving you an extra six months to pay your debt. Interest will still accrue, but the lack of penalty fees is an attractive reprieve. Be prepared to argue your case, as the IRS will need proof that immediate payments would cause a considerable financial loss.
Do your best to amass the funds you’ll need to pay off your taxes, but remember, even if you don’t come up with the total amount, you still need to file and utilize these resources to make a financial plan that will leave you debt-free. Happy tax season!