This article is presented for informational purposes only. If you have tax questions please consult with a qualified tax professional.
There’s a reason they call it “refund season.” The vast majority of income tax filers – upwards of 80 percent –receive some amount of refund from the federal government each year.
For most of us, our tax return is essentially an official request to have our own money returned to us. But not everyone gets a refund.
Most filers who owe taxes are aware that this will be the case, and if they’re wise, they plan for it by saving the necessary amount of money ahead of time. Sometimes, however, filers are expecting a refund, only to find out that they actually owe tax money instead.
That’s a pretty unpleasant surprise. And it can be a deeply distressing one, too, if you were counting on a refund and don’t have the funds to pay a tax bill you weren’t expecting.
So what do you do if you suddenly realize you owe the IRS money that you can’t possibly pay?
File your return on time
Even if you can’t pay, it’s vitally important that you still file your return on time. Not paying the amount due will result in a failure-to-pay penalty, but not filing your return at all will result in a failure-to-file penalty, which is usually 4.5 percent of the unpaid balance every month – significantly more than the failure-to-pay penalty, which is 0.5 percent.
Pay as much as you can comfortably pay
You only pay penalties on the unpaid amount, so it’s in your best interests to pay whatever you can, even if it’s not the full amount. The more you pay on time, the less it will cost you in future fees.
Those fees can really add up
You most certainly don’t want to just ignore the IRS, but if you do there is a cap on fees. The failure-to-file fee stops accruing after five months, but the failure-to-pay penalty will continue to accrue for up to 50 months. That means that your fees could end up being as much 47.5 percent of unpaid debt. Just another reason why you can’t afford to ignore the problem.
You can file an extension, but…
A timely extension will buy you more time to complete your tax return and save you from a failure-to-file penalty, but it won’t prevent a failure-to-pay penalty from accruing. In order to avoid a failure-to-pay penalty you would need to pay at least 90 percent of the due tax at the time you file for an extension. The rest needs to be paid by the extended due date.
You have repayment options
The IRS does offer installment plans to help manage the repayment process. Those repayment plans can run from 120 days to 6 years, depending on what you’re able to pay. Contact the IRS immediately if you discover that you owe taxes and aren’t able to pay. Depending on how much you owe, you may be eligible to apply for a repayment plan online.
Paying sooner is better
There are definite benefits to paying off your debt within 120 days. Where most repayment plans involve a set-up fee and a set monthly payment, if you can repay your debt within 120 days you may qualify for a Short Term Payment Agreement, which has no set-up fee and no set monthly payments. Essentially, 120 days’ worth of fees are added to your balance and then you are responsible for paying in full before the 4 months are up. You can then pay in as many or as few payments as you like.
There are penalties for defaulting on a payment plan
If you don’t follow through on all of the stipulations of the payment agreement, you may go into default. In order to get out of default, you will likely have to pay a fee (usually around $50).
Follow the plan
Stick to the payment plan and keep in contact with the IRS. The IRS has the ability to seize your property or rights to property in order to repay the outstanding tax bill. In this case, property includes:
- Wages and other income
- Bank accounts
- Business assets
- Personal assets (including your car and home)
- Social Security benefits
In other words, they will get their money, so it’s in your best interests to work with the IRS and make the process as close to painless as is possible.
Finally, you can be excused from paying failure-to-file and failure-to-pay fees if you can show reasonable cause for why you did not file or pay on time. The penalty relief protocols for the IRS are, unsurprisingly, a bit complicated, so if you believe you may have reasonable cause for not filing or paying on time (think more “My home is in the natural disaster area” and less “Wow, I just totally forgot all about it”) contact the IRS directly, or speak with a certified tax professional for assistance.
Being stuck with a tax bill you weren’t expecting can be scary and disruptive, but it’s important that you keep a clear head and face the issue head-on. Taking immediate and proactive steps will go a long way towards getting you past that debt and on to better things as quickly as possible. Good luck!