Tax returns are due on April 17th. That's tomorrow for those of you who are keeping track! Some of you are basking in the glow of a newly minted tax refund, while others are wondering how they're going to pay good old Uncle Sam the money that they owe.
In this economy a lot of people are finding that they just don't have the extra money laying around to pay their normal bills, much less a large tax bill. The reasons for that can be anything from not withholding enough money from their paychecks to self employment income that was higher than expected.
Whatever the reasons for owing taxes, what are you supposed to do if you can't pay?
File Your Taxes Anyway
Sure, you may owe more money than you can pay, but not filing your taxes isn't going to help you in any way. In fact, not filing your taxes in time can mean penalties for failure to file. Plus, if you don't file the IRS will end up preparing your return for you. They're not going to be as willing to search out deductions and exemptions that you might be entitled to. Plus, when you get the bill from them it's going to have your taxes due as well as penalties and interest! That can increase your tax bill by 20% or even more!
If you can't pay all of your taxes due, still file and pay as much as possible to reduce penalties and interest. Again, even if you file an extension, you'll still need to pay your taxes on April 15th.
What Are My Options If I Can't Pay Right Away?
You have options open to you if you can't pay your bill before the April 15th deadline:
- Extension of time to pay: The IRS can give you an extension from 30 to 120 days. The penalties and interest you would have to pay through an extension are usually less than if you ask for an installment plan.
- Installment agreement: Ask the IRS for a payment plan or installment agreement that will allow you to pay your taxes in monthly payments. If you owe $25,000 or less in combined tax, penalties and interest, you can complete the Online Payment Agreement (OPA) on the IRS Web site. If you owe more than $25,000, you may still qualify for an installment agreement, but you'll be required to complete a Collection Information Statement (CIS) so the IRS can determine the amount you can pay based on your monthly expenses.
- Use Savings Or Take Out A Loan: AInstead of doing an installment plan or asking for an extension, it might be a better option to take some money out of savings or take out a home equity loan to pay off your tax debt. Interest and penalties will go up while you make your payments on an IRS payment plan, so the interest you pay on a loan or credit card may be lower than the interest and penalties imposed by the IRS. I never like taking on new debt personally, so for me if I had the savings I would use those first. (Although if you had savings paying your tax bill might not be as much of a problem)
- Offer in compromise: An offer in compromise is an agreement between you and the IRS to settle your tax debt for less than you owe. Generally, an offer in compromise will only be accepted if the IRS thinks that it's doubtful you'll be able to pay the debt through other methods, there is question about the tax assessed being correct, or if you have special circumstances or extreme hardship.
If you decide to bury your head in the sand and not pay your tax bill, it's not going to go away. The IRS will file a Notice of Federal Tax Lien that can ruin your credit. They can also seize assets and take funds from bank accounts and paychecks to satisfy the tax debt. You don't want to mess around with the IRS (or the KGB as Dave Ramsey likes to call it)
Plan Ahead For Next Year
Finding out that you owe money at the end of the year is never a pleasant thing, but it is avoidable in most cases. To make sure it doesn't happen again next year, remember to check these things:
- Make sure you report the correct number of exemptions on your W-4 form. Your employer doesn't know your complete situation, so your withholding may not be correct. Make sure that it is, and adjust your withholding if necessary.
- Make quarterly estimated tax payments to cover any additional income for which tax isn't withheld.
- Re-check your withholdings a couple times throughout the year to make sure you're on track to not owe the IRS (or to get a huge refund).
- If you need to file for an extension, do it early! You can get up to a 6 month extension! (remember, any taxes due are still due on April 15th.)
Have you ever found yourself in a situation where you weren't able to pay a tax bill? How did you get yourself out of that situation? Tell us about it in the comments.