Here’s What To Do If You Don't Have Enough Money To Pay Your Taxes
Even though you still have time to file your taxes, you may want to get it over with sooner rather than later. Perhaps you finish your taxes, only to realize you owe money — if you get W-2s, maybe you’d decreased how much tax was withheld from your paychecks; even though you made more money with each check, you paid less tax, so now you need to pay up. Or, you freelance, have a sea of 1099s to contend with, and owe the government tax. But what happens if you cannot pay the money you owe for taxes? While you may go into panic mode — don’t.
“If you cannot immediately pay the money you owe for taxes this year, remember you don’t have to pay what you owe until the April 15 2019 tax deadline,” Lisa Greene-Lewis, CPA and tax expert for TurboTax, tells Bustle.
However, in any case, make sure you still file. “Even if you can’t afford to pay your taxes, file on time,” Andrew Latham at SuperMoney, a financial service comparison site that also helps consumers achieve their financial goals, tells Bustle. “Otherwise, the IRS will charge you a penalty for filing late — five percent of what you owe, charged monthly for up to five months — as well as interest on the taxes you owe and potential levies.” He says if you cannot file a return on time, file for an extension. “Plus, if the IRS does hit you with a penalty, you have options.”
So, it’s definitely best to still file and weigh your payment options versus not file at all. “If you don’t file a tax return, you could face civil and criminal penalties,” Latham says. “You may also be opening yourself to identity theft — the longer you don’t file a return, the more likely somebody will use your social security number to file a false tax return.” He says that, overall, the consequences of not paying your taxes vary depending on how much you owe, what you own, and whether you filed a tax return.
Below, experts weigh in on what happens when you can’t pay what you owe in taxes — and how to create a plan for doing so.
1Create A Budget
Before doing anything, create a budget, Ash Exantus, director of financial education and financial empowerment coach at BankMobile, tells Bustle. “Come up with an itemized budget of your income versus your expenses (necessities only), and determine a set amount that you will be able to pay,” he says. Then, he says to practice what you are going to say so you are prepared to explain why you need to request a payment plan (if that is what you decide).
2Make Sure You Contact The IRS Before They Contact You
Exantus says to make sure to contact the IRS before they get in touch with you and let them know what you can afford to pay. “You do not want them to contact you first, and then take action against you, since this puts you at risk of having your wages garnished or your bank accounts frozen,” he says. “By calling the IRS before they contact you, you will have the chance to get in front of them before the payment is due, and your request has a higher likelihood of being accepted.”
3Make A Helpful Money Move, Like Contributing To Your IRA
Greene-Lewis says that if you have done your taxes, but have not filed yet, try to make a smart money move. This may not be financially possible for everybody, but it may work for you. “For example, contribute to your IRA by the tax deadline, April 15, and you may be able to deduct what you contribute on your 2018 taxes,” she says. “You can contribute up to $5,500 ($6,500, age 50 and over) and, in turn, you may receive the Saver’s Credit up to $1,000 ($2,000, married filing jointly) just for contributing to your retirement.”
4Apply For An Installment Agreement
Just like other debts you may have, you can set up an installment agreement to pay what you owe. Latham says that if you owe less than $10,000, you can apply for a guaranteed installment agreement with the IRS. “You can apply for these online and approval is, well, guaranteed,” he says. “This is a good option for taxpayers who have a cash flow problem — they have the income to afford their taxes, but they need some time to catch up.”
If you owe more than $10,000, but less than $50,000, you can apply for a streamlined installment agreement. “These plans are not quite guaranteed, but the IRS will usually approve them,” Latham says.
Exantus also suggests creating an entirely new bank account when you are going to set up a payment plan with the IRS. “You should make the payments automatic; this way, you will never miss one,” he says. “Work with your employer to have funds deposited from your paycheck into this account, and set up the payments direct to the IRS.”
One thing to keep in mind, however, is that the IRS charges interest on your tax debt. “Currently, the IRS rate is nine percent, and this does not include late-payment fees and late-filing penalties,” Latham says. “If you have assets to sell or you can borrow money from a bank or friend, you can save money by paying your taxes in one lump sum.” He says before committing to an installment agreement, check what other tax relief options are available.
5Consider A Credit Card Or Bank Loan
Greene-Lewis says that while a credit card or bank loan may not be the best option since you don’t want to create additional debt, they may be a better option than an installment agreement if the interest rates are lower than the interest the IRS would charge. “You can apply for a bank loan, home equity loan, or take a cash advance on a credit card to pay your tax bill if the interest on the loan is lower than the interest on an installment agreement,” she says.
6File For Penalty Relief
Exantus says that many people may not be aware of this, but if it’s your first time failing to meet your tax payments, you can write a letter to the IRS asking for a First Time Penalty Abatement, which may relieve you of additional penalty fees. “In your letter, explain why you owe the money and why you cannot afford to pay it back at this time,” Exantus says. “However, keep in mind that the request can only be made once and is not a long-term solution.”
7Look At The IRS’ “Offer In Compromise” Option
If you do not pay the IRS, they may levy your bank accounts and put liens on your property. So, if you don’t want the IRS to freeze your accounts, then take the money from your bank account or claim your property, you have another option. Latham says that if you cannot afford to pay all your taxes and have some income and assets to protect, you can consider the IRS’ “Offer in Compromise” option — as long as your income and assets fall within the IRS’ eligibility criteria. This way, you can try to settle your tax debt for less than what you owe. But, Latham says that the application process is complicated. “Plus, the approval rate is around 40 percent — so it may be a good idea to hire a tax relief expert,” he says.
Similarly, Exantus says to keep in mind that if you would be able to pay off your tax liability in installments, you are not likely to get accepted.
8You May Be Eligible For “Currently Not Collectible”
If none of the above apply and you cannot afford to make any type of payment, you do have another option. “If you have no assets and little income, you may be a candidate for “Currently Not Collectible” (CNC) status,” Latham says. “In such a case, the IRS will not try to collect taxes until you can afford it.” He says the catch is, you will have to prove it, of course. “Expect a mountain of paperwork and annual audits,” Latham says. “This can be tricky, so it may also be a good idea to consult with a tax expert before you go down this path.”
As you can see, even if not being able to pay the IRS may seem overwhelming and stressful, you have several options to make it less so. Plus, time is on your side since there’s still two months before taxes are due. You can always call the IRS, too, at 1-800-829-1040, to talk about your tax payment options, which you may want to do soon — the closer it gets to April 15, the more calls they’ll probably receive. In any case, be confident in that you can come up with the payment solution — the one that is right for you.