What If I Can't Afford To Pay My Taxes?

This week we hear from Sam in Reisterstown:

Dear Alice,

I owe taxes and I don’t have the money. What are my options?

Sam

Dear Sam,

The most important thing is to file your return on time even if you can’t pay the taxes. The penalties on owing taxes go up exponentially if you don’t file your return timely.

For example, if you owe the IRS $1,000 and file on time, the penalties are only one-half of 1 percent per month. If you don’t file your return on time, the penalties go up to 5 percent of the unpaid balance for failure to file your return. You are looking at the difference between $5 and $50 a month – 10 times more if you don’t file by the due date of the return.

But wait, it gets worse. If you file your return more than 60 days after the due date IRS can hit you with a penalty that is 100 percent of your tax owed…ouch!

Once you file your return with the IRS, the penalties for failure to pay are one-half of 1 percent of the taxes due each month. These penalties cannot exceed 25 percent of your unpaid taxes. If you can’t find another way to pay your taxes, you can make payment arrangements with IRS for the tax due. The interest rate for your loan would be the AFR (applicable federal rate), which runs around 5 percent, but varies from month to month, plus 3 percent. You also pay the penalties I outlined above.

So, if you file your return in a timely fashion, your interest would be around 9 percent (or higher if the APR goes up), as opposed to below 14 percent if you don’t file your return on time. 

IRS makes it fairly easy to file for a payment arrangement. Go to http://www.irs.gov/pub/irs-pdf/f9465.pdf to access the form 9465. The requirements are pretty straightforward.

1. You must be current on all your tax filings.

2.Your tax owed must be less than $25,000.

3.You must pay the tax within five years.

The form asks for your personal information, how much you owe, what day of the month you’ll make your payments and how much you can pay each month. If you can meet those requirements and supply the above info, the IRS will accept your payment arrangement with no questions asked.

There is a processing fee of $110 to request the payment arrangement, but IRS will cut that almost in half if you agree to direct debits from your account.

Good luck Sam.

Many Happy Returns!

Alice A. Reid, EA

Disclosure: The nature of taxation is complex and information used to complete your personal tax return is dynamic – meaning that one area of your tax return can affect others, while our goal is to provide you with good general information, IRS may require certain documentation or substantiation to support any tax position you take on your tax return. If your issue is complex we recommend you talk to a tax professional who can better understand your entire tax situation and advise you appropriately.