April 15 is fast approaching, and if you find yourself staring at a tax bill you can’t afford to pay, you’re not alone. Many taxpayers face this situation each year, and while it can feel overwhelming, the worst thing you can do is ignore it. Burying your head in the sand will only make matters worse, leading to penalties, interest, and potential enforcement actions from the IRS. Instead, take proactive steps to manage your tax debt. Here are five solutions to help you navigate this financial hurdle.
File Your Tax Return on Time, Even If You Can’t Pay
One of the biggest mistakes taxpayers make is failing to file their return because they can’t pay what they owe. However, not filing can lead to hefty failure-to-file penalties, which are more severe than the failure-to-pay penalties. The failure-to-file penalty is typically 5% of the unpaid taxes per month, up to a maximum of 25%. In contrast, the failure-to-pay penalty is only 0.5% per month. By filing on time, you avoid unnecessary additional charges.
Pay What You Can
Even if you can’t pay your entire tax bill, paying as much as you can upfront will help reduce the amount subject to interest and penalties. The IRS charges interest on unpaid taxes, which compounds daily. Making a partial payment demonstrates good faith and minimizes the long-term cost of your debt.
Request a Payment Plan (Installment Agreement)
If you can’t pay your tax bill in full, the IRS offers payment plans that allow you to pay in smaller, more manageable amounts over time. There are two types:
⦁ Short-term Payment Plan: If you can pay your balance within 180 days, you may qualify for a short-term agreement without additional setup fees.
⦁ Long-term Installment Agreement: If you need more time, you can apply for an installment agreement, which allows payments over several years. While interest and penalties still accrue, this option prevents more severe collection actions.
Consider an Offer in Compromise (OIC)
For those in financial distress, the IRS may accept an Offer in Compromise, allowing you to settle your tax debt for less than the full amount owed. This option is not guaranteed and requires a thorough review of your financial situation, including income, expenses, assets, and ability to pay. The IRS typically approves OICs only when it believes the taxpayer cannot reasonably pay the full debt.
Explore Other Financing Options
If an IRS installment agreement doesn’t work for your situation, consider other ways to pay your tax debt:
⦁ Using a Credit Card or Personal Loan: While not ideal, using a low-interest credit card or personal loan may be less expensive than IRS penalties and interest.
⦁ Home Equity Line of Credit (HELOC): If you own a home, a HELOC may offer a lower interest rate compared to IRS penalties.
⦁ Borrowing from Retirement Savings (with Caution): In some cases, a 401(k) loan or IRA withdrawal could be an option, but beware of tax consequences and potential penalties.
Final Thoughts: Don’t Ignore the Problem
The key takeaway is to take action—ignoring your tax debt won’t make it disappear. The IRS offers multiple options to help taxpayers manage their obligations, but you must take the initiative to seek them out. Whether you set up a payment plan, explore an Offer in Compromise, or find an alternative way to cover the debt, addressing the issue head-on will prevent unnecessary penalties and financial stress.
If you need guidance, consider consulting Saunders Tax & Accounting at www.SaundersTax.com or call us at 301-714-2071. Open Monday – Friday 9 am to 9 pm and Saturdays 9 am to 3 pm. Awarded the Hagerstown Chamber of Commerce “2023 Small Business of the Year” and Hagerstown Hotlist 2024, we have been providing a Less Taxing Life and More Prosperous Solutions since 1984!
