Finding out you owe taxes can be stressful, especially if you’re unable to pay the amount in full. However, it’s important to understand that ignoring the issue won’t make it go away. The IRS offers several options to help taxpayers navigate this challenge and avoid harsh penalties. Here’s what happens if you owe taxes but can’t pay, and what steps you can take.
1. Immediate Consequences of Owing Taxes
When you owe taxes and don’t pay by the deadline, interest and penalties start to accumulate immediately. The IRS imposes a failure-to-pay penalty of 0.5% of your unpaid taxes for each month (or part of a month) that the taxes remain unpaid, up to a maximum of 25%. Additionally, interest accrues on both the unpaid balance and the penalties, increasing your overall tax debt over time.
2. Notifying the IRS
If you’re unable to pay your taxes, the most important thing to do is to notify the IRS. Ignoring the issue may result in more severe actions like liens, levies, or wage garnishments. By being proactive and communicating with the IRS, you may qualify for one of their payment relief options, which could help you avoid these more drastic measures.
3. Payment Plan Options
The IRS provides several payment plan options for taxpayers who can’t pay their taxes immediately:
- Short-Term Payment Plan: For those who need more time but can pay off their debt within 180 days. This option does not require a setup fee, though interest and penalties still apply.
- Long-Term Payment Plan (Installment Agreement): If you need more than 180 days, you can opt for a long-term payment plan. With this option, you can make monthly payments over an extended period. A setup fee may be required, but you can spread out the financial burden.
4. Offer in Compromise (OIC)
In some cases, you might be eligible for an Offer in Compromise (OIC). This is an agreement between you and the IRS to settle your tax debt for less than the full amount owed. To qualify, you must demonstrate that paying the full amount would create financial hardship. The IRS considers factors such as your ability to pay, income, expenses, and asset equity.
Applying for an OIC can be a complex process, so it’s often beneficial to work with a tax professional to determine if you’re eligible and to guide you through the application process.
5. Requesting a Temporary Delay
If you’re facing an extreme financial hardship, you may be able to request a temporary delay in the collection process. If the IRS agrees that you can’t pay any of your taxes due to your current financial situation, they may temporarily classify your account as “currently not collectible” and stop collection activities. However, interest and penalties will still accrue, and the IRS may file a federal tax lien against you during this time.
6. Penalty Abatement
If your failure to pay was due to a reasonable cause, you might qualify for penalty abatement. Life events such as illness, natural disasters, or other unavoidable circumstances could make you eligible to have penalties reduced or eliminated. While interest will still accrue, penalty abatement can help reduce the overall amount you owe.
7. What You Shouldn’t Do
When faced with unpaid taxes, the worst thing you can do is ignore the problem. Avoid making these mistakes:
- Filing late: Even if you can’t pay your taxes, always file your tax return on time. This will prevent the failure-to-file penalty, which is much higher than the failure-to-pay penalty.
- Not communicating with the IRS: Failing to reach out will escalate the issue. It’s better to inform them of your situation and work out a solution.
- Taking out high-interest loans: While you might feel desperate to pay off your taxes, taking out loans with exorbitant interest rates could put you in an even worse financial position.
8. Work with a Tax Professional
Navigating tax debt can be complicated, especially when penalties and interest are involved. A tax professional can help you evaluate your options, negotiate with the IRS on your behalf, and find the best solution for your situation. They can also help ensure you meet all deadlines and avoid further penalties.
Final Thoughts
Owing taxes that you can’t pay is a daunting situation, but it’s not the end of the world. The IRS offers several options to help ease the financial burden. By acting quickly and working with a trusted tax advisor, you can resolve your tax debt in a manageable way.
At Key2 Accounting, we can help you understand your options and develop a plan that works for you. Whether you need help setting up a payment plan, applying for an Offer in Compromise, or filing for penalty abatement, our team is here to support you every step of the way. Reach out to us today to get started.
