What to Do When You Can’t Pay Your Taxes

If you can’t pay your taxes this year, you may be worrying about what you should do. First, you should know that you’re not alone.

Millions of taxpayers struggle with taxes each year and need help. The good news is there is help available. The IRS will work with you and provide options for paying your taxes.

The key is to take action. There are serious consequences for not filing or paying your taxes.

Your best bet is to enlist the help of a tax professional. Here’s a look at some realistic options if you can’t afford to pay your taxes.

IRS Alternatives for Tax Payment

The IRS and many states offer options for those who are struggling with paying taxes. To take advantage of one of these options this tax season, you must submit the correct paperwork and supporting documentation to the IRS.

A tax expert can help you navigate the process that’s best for your situation. Here are the options.

Request a Short-Term Payment Extension

If you can’t pay your taxes on time and need a few extra months, you can request a 120-day or four-month payment agreement. This is similar to an installment agreement.

There isn’t a fee for setting up a payment extension, but you will accrue interest and penalty charges. This option is available if you owe less than $100,000 in unpaid taxes.

Set up an Installment Agreement

If you are behind on your taxes but feel you can get caught up in the future, an installment plan is a good option. After filing your tax return, you can fill out an installment application on the IRS website.

Another option is to send your return by mail and include IRS Form 9565. This is for taxpayers who have an interest in setting up an installment plan.

The IRS allows 72 months to pay your taxes if you owe $50,000 or less in tax penalties and interest. IRS will only allow you to pay in installments if you’re up to date on filing past tax returns.

If you’ve neglected to file your taxes in previous years, you cannot set up a payment agreement. You do pay interest and penalties if you set up a payment plan.

Choose a Guaranteed Installment Agreement

A guaranteed installment is the easiest payment plan to obtain. This option is for taxpayers owing less than $10,000 who can pay the entire amount back in three years.

The IRS guarantees this option. There are a few qualifications you must meet for approval.

Go With a Financially Verified Installment Agreement

Do you owe $100,00 or more in unpaid taxes? If so, you may have to pay down your tax balance or verify your financial information.

This must be done before you can obtain a financial agreement for more than $100,000. To qualify for this type of agreement, you must provide detailed financial documentation to the IRS.

The IRS uses this information to verify your financial ability to make scheduled payments.

Request an Offer in Compromise

If you’re struggling to pay your taxes, an offer in compromise is a smart approach. This allows you to propose an offer of what you think you can pay.

If the IRS accepts your offer, that is the amount you will pay. This option allows you to settle your tax amount for less than what you actually owe.

This is a good option if you’re unable to pay the full tax liability or if doing so will create financial hardship for you. Each case is based on its unique set of circumstances, including:

• Your ability to pay
• Your income
• Your asset equity
• Your expenses

An offer in compromise is an option when the amount you offer to pay is all the IRS expects to collect within a reasonable amount of time. It’s a good idea to speak with a tax professional and explore all payment options before requesting an offer in compromise.

In addition, you will need to pay a $205 application fee. This may be waived if you meet IRS low-income certification guidelines.

If you’re behind in taxes but feel there’s an error in the amount you owe, you may be able to avoid the fee by submitting IRS Form 656-L “Doubt as to Liability.”

If you owe taxes, you want to resolve the debt as soon as possible. An offer in compromise is a viable option if you owe a substantial amount, have limited assets, and have a limited ability to pay the debt.

If the IRS believes you will have the means to pay your taxes within the statute of limitations (usually 10 years) they won’t accept the offer.

Typically, you need to pay 20% of the offer upfront and the remaining amount through installments. If the IRS accepts your offer in compromise but you fail to pay, they can sue you for the balance of the original amount plus penalties and interest.

Obtain a Hardship Status (CNC Status)

A hardship status is declared if the IRS deems your account uncollectible. To qualify for hardship status, you must prove you don’t have the necessary resources to pay your tax bill.

The IRS has guidelines on the amount of money people need to live. If you make less than the amount they feel you need for rent, clothing, food, transportation, and other essentials, you can obtain this status.

Generally, if you have $25 or less in disposable income each month, you can obtain CNS status which stands for currently not collectible. It simply means you don’t have the necessary income to pay your tax debt.

In this situation, the IRS may pause collection on your account. After you apply, the IRS will review your case. If you receive CNC status, it’s a temporary agreement.

The IRS will review your account yearly or every other year. If your finances improve, they will expect you to pay your tax debt.

Ask for Penalty Relief

You could qualify for penalty relief if you were unable to pay your taxes due to circumstances beyond your control. For example, if you’re a new business owner who accidentally missed the deadline for corporate filings or your accountant failed to file on time, you may have grounds for penalty abatement.

Many taxpayers are unaware that this option exists. You must contact the IRS to apply for penalty relief.

Consult a Tax Professional

If you owe taxes you cannot pay, it can be very stressful. Unless you’re a tax expert, it’s a good idea to speak to a tax or financial planning professional.

Every situation is unique, and they can help you find the right solution for your financial needs. The IRS provides multiple options for paying down tax debt.

There are other alternatives that may work for you as well. A tax professional can evaluate your situation status, and your ability to pay. They can help you make the right decisions for paying off or reducing your tax debt.

What Happens If You Pay Your Taxes Late?

During the work year, you should make estimated tax payments to the IRS. This may be through automatic withholding for W-2 employees or through manual payments from 1099 employees.

When you file your tax return, you discover if those estimated tax payments covered what you need to pay or if you paid more income tax than necessary. This determines whether you get a tax bill or a tax refund.

If you owe taxes and don’t pay on time, you’ll receive notice from the IRS. If you don’t pay at this point, you’ll receive at least one more notification.

Interest and Penalties on Late Taxes

During this time, any unpaid taxes will begin accruing interest and penalties. Interest begins accruing according to the due date on the notice. It compounds daily to the unpaid tax balance.

Typically, the interest ranges between 3% to 5%. Inflation has led to an increase of 7% for 2023. That means if your tax bill is $1,000, you’ll be charged around $6 a month in interest for each month you don’t pay your taxes.

There are additional fees as well. The failure-to-pay penalty is 0.5% per month, up to the maximum of 25% of your unpaid balance.

You will also be charged additional interest and penalties on any unpaid local or state taxes. These rates are set by the state.

If you don’t pay your taxes at this point, any unpaid balance may come out of any future tax refunds you may be entitled to. Beyond this, the IRS could place a lien on your assets or property.

A lien could later become a levy. This means the IRS could seize your property for payment on your tax bill.

You can go to jail for failing to file or pay taxes. This is not likely unless your tax bill is hundreds of thousands of dollars.

If many years have passed, luck may be on your side. There’s a 10-year statute of limitations for collecting late taxes.

What Do I Do If I Haven’t Paid Taxes in Years?

Paying taxes is a challenge for many people. It’s easy to neglect your taxes, but it’s a bad decision.

If you neglect your taxes year after year, the tax burden continues to pile up. If you haven’t paid taxes in multiple years, it is important to address the situation as soon as possible. You could face serious consequences otherwise.

The IRS can collect late taxes for up to 10 years. There are a few exceptions for bankruptcy, living abroad, or filing an offer in compromise or an installment agreement.

A few steps to take if you owe a lot of back taxes include:

Getting Transcripts From the IRS

The IRS keeps tax transcripts for each year you’ve worked and earned income if your employer reported it. You can request a transcript from the IRS to find out what they believe you owe in taxes.

There are 5 types of transcripts.

Tax Return Transcript

This shows the types of returns you’ve filed in the past if any. Lenders sometimes ask for a tax return transcript before approving a loan or mortgage.

Tax Account Transcript

This type of transcript includes data about you. It includes information about whether you file taxes jointly with your spouse or as an individual.

Wage and Income Transcript

This transcript contains the IRS’s information on your past employment. It includes income information and how much you’ve paid over time in estimated tax.

Record of Account Transcript

This shows a record of past filings. It includes information from your tax return transcript and tax account transcript.

Non-Filing Letter Verification

If you have failed to file your taxes in previous years, the IRS may have a record of it. The verification of non-filing letter is proof they didn’t receive an individual tax return from you.

File Your Taxes

If you are planning to file taxes for prior years, collect as much documentation as possible, including 1099 and W-2 forms. You may need to contact previous employers who may still have this information on file.

Finding previous tax return forms is simple. The IRS has a database that goes back over a century. It’s in your best interest to contact a tax professional to ensure you are filing back taxes correctly.

You want to be sure you’re taking the correct exemptions and deductions for each year you need to file back taxes. It’s good to know if your tax debt is too high, the IRS has options to help you.

Contact the IRS

If you owe more than you can afford to pay, don’t ignore the problem. Contact the IRS to set up a payment plan or another alternative.

Get Help With Your Tax Debt

If you’re struggling to pay your taxes or are facing years of unpaid taxes, there is hope. It’s a common problem, and there are options available to help you pay your tax debt and get back on track.

At Polston Tax, we tackle your tax problem for you! You will have a whole team of tax professionals on your side. Our goal is to provide the tax help you need to resolve your tax liability issues once and for all.

We’d love to hear from you and help you with all of your tax needs.

Contact Polston Tax today to get started.