Tax returns are due on April 18th this year because of a holiday weekend. Although we'll have an extended time to file and pay this year, there are some out there who still aren't going to have enough money to pay good old Uncle Sam this year. The reasons why people come up short can be numerous, but usually it's either not withholding enough money from their paychecks, job losses or self employment income that was higher than expected.
The reasons for why you came up short in paying your taxes may not be the important part, but how you're going to pay. What are you supposed to do if you can’t pay your taxes?
File Your Taxes And Pay As Much As You Can
The first thing people often think about doing is just not filing their taxes. While it may feel good to stick your head in the sand, not filing is probably not a good idea because you'll have to file eventually anyway, and not filing can lead to some hefty penalties for failure to file.
Another reason why you should still file even if you can't pay is that if you don't file, the IRS will prepare a return for you. Since the IRS really doesn't have your best interests at heart, they aren't going to claim all your deductions and credits for you. Because of that you'll end up owing a higher tax bill – and increased penalties and fees for failure to file! So not filing at all can increase your tax bill by 20% or even more!
So if you owe money but can't pay it all, your best bet is to still file, and pay as much as you possibly can in order to reduce any penalties or interest you might have to pay.
One thing to note – even if you file for an extension to file your taxes, you’ll still need to estimate and pay your taxes on April 18th. An extension doesn't allow you to extend the time to pay as well unfortunately.
Other Options If You Can’t Pay Taxes Right Away
If the April 18th deadline is quickly approaching and you don't have enough capital to pay your bill, there are some options open to you:
- Extension of time to pay: An extension from 30 to 120 days may be granted by the IRS. The penalties and interest you would receive through an extension are usually going to be lower than if you ask for an installment plan. Form 1127
- IRS Installment agreement: Ask the IRS for a payment plan or installment agreement that will allow you to pay your taxes in monthly payments. If you owe $25,000 or less in combined tax, penalties and interest, you can complete the Online Payment Agreement (OPA) on the IRS Web site. If you owe more than $25,000, you may still qualify for an installment agreement, but you’ll be required to complete a Collection Information Statement (CIS) so the IRS can determine the amount you can pay based on your monthly expenses. Form 9465
- Get A Loan Or Use Emergency Fund: Instead of doing an installment plan or asking for an extension, you might want to consider taking out a loan (from a place like Lending Club) or using your emergency fund if you have one in order to pay your taxes. While you'll have to pay interest on any loans you take out, or any credit cards you use, the interest and penalties may end up being lower than the interest and penalties imposed by the IRS. While I would hardly ever consider taking out new debt, one time I might consider doing it is to pay off the IRS.
- Offer in compromise: An offer in compromise is an agreement between you and the IRS to settle your tax debt for less than you owe. In most cases an offer in compromise is only going to be accepted by the IRS if it thinks that it’s doubtful you’ll be able to pay the debt through other methods, there is question about the tax assessed being correct, or if you have special circumstances or extreme hardship.
Your tax bill isn't just going to go away, and the IRS never forgets. You don't want to be on their bad side because they will take you for everything you own. They'll file a Notice of Federal Tax Lien that can ruin your credit. They can also seize assets and take funds from bank accounts and paychecks to satisfy the tax debt – without asking. You don’t want to mess around with the IRS, so do your best to take care of your obligations, before they force you to.
Make Sure It Doesn't Happen Next Year. Plan Ahead
Finding out that you owe money at the end of the year is never a pleasant thing, but it is avoidable in most cases. To make sure it doesn’t happen again next year, remember to check these things:
- Check your W-4 form and make sure that you have picked enough exemptions. Your employer won't always update your forms if changes happen in your life, so your withholding may not be correct. Make sure that it is, and adjust your withholding if necessary.
- If you make self employment income make sure your estimated tax payments are being sent in throughout the year – so enough taxes are paid before tax time.
- Re-check the amount being withheld from your paychecks once or twice throughout the year and make sure that you aren't on track to owing a big chunk of money again next year.
Are you currently in a situation where you're coming up short to pay a tax bill? Are you going to file anyway, and try to figure out a way to pay?