While you probably do not have any problems paying your tax bills, you may wonder: What happens in the event you (or someone you know) cannot pay taxes on time? Here is a look at the options.
Most importantly, do not let the inability to pay your tax liability in full keep you from filing a tax return properly and on time. In addition, taking certain steps can keep the IRS from instituting punitive collection processes.
Common Penalties
The ‘failure to file’ penalty accrues at five percent per month or part of a month (to a maximum of 25 percent) on the amount of tax your return shows you owe. The ‘failure to pay’ penalty accrues at only 0.5 percent per month or part of a month (to 25 percent maximum) on the amount due on the return. (If both apply, the failure to file penalty drops to 4.5 percent per month (or part) so the combined penalty remains at five percent.) The maximum combined penalty for the first five months is 25 percent. Thereafter, the failure to pay penalty can continue at 0.5 percent per month for 45 more months. The combined penalties can reach 47.5 percent over time in addition to any interest.
Undue Hardship Extensions
Keep in mind that an extension of time to file your return does not mean an extension of time to pay your tax bill. A payment extension may be available, however, if you can show payment would cause ‘undue hardship.’ You can avoid the failure to pay penalty if an extension is granted, but you will be charged interest. If you qualify, you will be given an extra six months to pay the tax due on your return. If the IRS determines a ‘deficiency,’ the undue hardship extension can be up to 18 months and in exceptional cases another 12 months can be added.
Borrowing Money
If you do not think you can get an extension of time to pay your taxes, borrowing money to pay them should be considered. You may be able to get a loan from a relative, friend, or commercial lender. You also can use credit or debit cards to pay a tax bill, but you are likely to pay a relatively high interest rate and possibly a fee.
Installment Agreement
Another way to defer tax payments is to request an installment payment agreement. This is done by filing a form and the IRS charges a fee for installment agreements. Even if a request is granted, you will be charged interest on any tax not paid by its due date. But the late payment penalty is half the usual rate (0.25 percent instead of 0.5 percent), if you file by the due date (including extensions).
The IRS may terminate an installment agreement if the information provided in applying is inaccurate or incomplete or the IRS believes the tax collection is in jeopardy. The IRS also may modify or terminate an installment agreement in certain cases, such as if you miss a payment or fail to pay another tax liability when it is due.
Avoid Serious Consequences
Tax liabilities do not go away if left unaddressed. It is important to file a properly prepared return even if full payment cannot be made. Include as large a partial payment as you can with the return and work with the IRS as soon as possible. The alternative may include escalating penalties and having liens assessed against your assets and income. Down the road, the collection process also may include seizure and sale of your property. In many cases, these nightmares can be avoided by taking advantage of options offered by the IRS.