When You Can't Pay Your Taxes
It's a disturbing moment when you finish your tax return and realize you owe additional tax and don't have the money to pay it. Don't panic. First of all, don't compound the problem by filing your tax return late. File by the due date or file for an extension even if you can't pay the tax due. Penalties for late filing can add up to 25 percent to your tax bill.
You have a number of options for coming up with the cash later. Try to take out a bank loan for the amount you owe. The interest rate is usually lower than the rate charged by the IRS. If that doesn't work, consider using your credit card or applying for a new card with a low introductory rate and paying the balance off before the rate goes up.
Your first step should be to request an Extension of Time to Pay from the IRS. This may give you some breathing room of one to four months. It is the most economical way to delay your payments — less expensive than an installment loan with the IRS. You can usually find out immediately (online) whether or not you qualify for this program.
Another option is to request an installment agreement with the IRS by completing Form 9465, Installment Agreement Request, and attaching it to your return. You can also make your request online. State the amount you can pay monthly toward your tax debt. If your request is approved, you'll have to pay interest at up to 0.50 percent per month, and you may have to pay additional penalties.
Your last resort is an Offer in Compromise. You can make an offer to the IRS and see if they'll accept it. Your odds of success here are very slim — your request will only be granted if your financial situation suggests that the IRS can never collect from you. You'll have to pay a fee and submit a portion of your proposed settlement amount up-front, but it may be better than doing nothing and getting into legal trouble.
Be Prepared in the Future
To ensure that this doesn't happen to you again, review your withholding every year and make sure you're having enough taken out to cover your income. If you receive income that taxes weren't withheld from, make quarterly estimated tax payments or increase the amount of your withholding at work to compensate.
You can avoid incurring tax penalties for underpaying taxes by estimating your tax liability before the end of the year to allow time to catch up if you've been underwithheld. If your tax status has changed during the year (for example, you've gotten married or divorced or added a dependent), do a projection of your taxes using your new status as soon as possible after the change takes place. To avoid penalties, you must pay at least 90 percent of your tax for the current year before December 31, or at least as much as your total tax liability for the prior year.
Tax Freedom Day illustrates how much of the average American's budget goes toward paying for government services. It's the day by which you will have worked enough to pay your tax obligations for the year, starting from January 1.
If it looks as if you may not have had enough tax withheld, change your withholding by filing a new W-4 with your employer to have additional tax taken out each pay period through the end of the year. After the start of the new year, complete another W-4 to adjust your withholding back to a more normal amount. The withholding calculator on the IRS Web site will help you determine what your withholding should be and is more accurate than the worksheets used on the W-4 form. On the IRS site, enter the keywords “Withholding Calculator” in the search box.
