Can’t Pay IRS or State Taxes?
Overview of Consequences & Resolution Options
What If I Can’t Pay My Taxes?
Maybe you’ve filed your taxes and are surprised by the amount that you owe. Or, maybe you know you’re going to owe more in taxes than you can pay, so you’re putting off filing because you don’t want to see that figure.
Either way, you’re probably stressed, scared, and uncertain of what to do next.
You’re also not alone. Many people find themselves in situations where they can’t pay their taxes by the IRS and state deadlines. The first thing to do is to take a breath and not panic. There are several options to help you deal with unpaid taxes and we’ll guide you through the whole process. To get help now, contact us at the W Tax Group today.
What Happens If I Can’t Pay My IRS Taxes?
If you have filed your taxes but can’t pay by the deadline and don’t take any additional actions, you will receive a letter from the IRS that outlines what you owe and asks you to pay. You will also incur penalties, interest, and collection actions. Here are more details.
Failure-to-Pay Penalty
The IRS charges a Failure-to-Pay Penalty if you don’t pay the tax you owe by the return’s due date. Note that if you request an extension, that only changes the filing deadline. You are still expected to pay by the original due date.
The Failure-to-Pay Penalty is 0.5% of your unpaid taxes, and it’s charged for each month or part of a month as long as your taxes are unpaid. The penalty won’t exceed 25% of your unpaid taxes, but the longer your taxes are overdue, the higher the penalty is.
Interest
The IRS also charges interest on the tax debt as well as the penalties, so it’s important to pay off your owed taxes and penalties as soon as possible.
Federal Tax Liens
If you don’t pay your taxes and the amount that you owe adds up, the federal government might put a lien on all of your assets including your home. If you sell your home, the lien means that the amount that you owe the IRS would be deducted from the sale price before you receive the rest of the money from the sale.
Wage Garnishments and Asset Seizures
The IRS can also enforce collections. The agency might use a bank levy to collect money from your bank account. The IRS could also garnish your wages and take a significant portion out of each paycheck.
What Happens If I Can’t Pay My Taxes and I Don’t File a Return?
Maybe you know you won’t be able to pay your taxes, so you’re putting off filing your taxes at all. That’s an expensive mistake that can make your situation worse. The penalties for not filing are much worse than the penalties for not paying.
If you don’t file your taxes, then the IRS can charge you a Failure-to-File Penalty. The Failure-to-File Penalty is 5% of your unpaid taxes, and it’s charged for each month or part of a month that your tax return is late. It is capped at 25% of your unpaid taxes.
Your Failure-to-File Penalty can quickly add up. Consider the following:
- If your return was over 60 days late, your Failure to File Penalty will be a minimum of $450 or 100% of the amount owed — the IRS uses the smaller of these numbers.
- Although the Failure-to-File Penalty maxes out if you haven’t paid within five months, you will still be charged the Failure-to-Pay Penalty until it maxes out.
- The IRS charges interest on Failure-to-File and Failure-to-Pay Penalties, so the amount that you owe will continue to grow unless you focus on paying the balance off.
Even if you know that you won’t be able to pay your taxes, it’s still important to file your tax return to avoid Failure-to-File Penalties. Once you’ve filed your back taxes, there are several options to help you pay your taxes and avoid steep penalties.
What If I Can’t Pay State Taxes?
If you don’t pay state taxes, the state will assess penalties and interest against you. The state may also try to forcibly collect the payment through garnishments, liens, and seizures. Many states also take away driving or hunting licenses. Most states will rescind business licenses for unpaid business taxes.
State tax procedures vary, and the specific penalties, interest, and collection actions you might face will depend on your state. To learn more, contact your state’s tax agency or visit their website to understand the consequences you might face.
What to Do if You Can’t Pay Your Taxes
If you can’t pay your taxes, you have many options to explore. Being proactive and exploring your options can help to minimize the penalties you’ll pay and can give you a clear plan for paying your taxes. Here’s what you should do.
Find Out Exactly What You Owe
Contact the IRS and your state tax department if you’re unsure what you owe. Remember that penalties and interest will continue to accrue as long as your tax debt remains unpaid.
Explore IRS Tax Payment Solutions
The IRS offers several options to help you pay your tax bill.
- Apply for a short-term payment plan — The IRS offers short-term payment plans to taxpayers who owe less than $100,000 in combined tax, penalties, and interest. The short-term plan gives you 180 days or less to pay your tax balance. You will still need to pay for Failure-to-Pay Penalties and accrued interest.
- Apply for a long-term payment plan — If you owe $50,000 or less in assessed tax (without counting penalties and interest), and you have filed all of your required tax returns, you may be eligible for a long-term payment plan. When you opt for a long-term payment plan, you will still pay Failure-to-Pay Penalties and accrued interest until you have paid off your tax debt in full.
Generally, the IRS gives taxpayers up to six years to pay their tax debts. However, the amount of time you get to pay depends on your finances and the Collection Statute Expiration Date (CSED).
Look at IRS Settlement or Relief Options
- Make an offer in compromise — If paying your tax debt creates a financial hardship, you may be able to apply for an Offer in Compromise with the IRS. You should explore all other payment options before making an Offer in Compromise. If accepted, your offer can allow you to settle for less tax debt than you actually owe. It can be difficult to obtain an Offer in Compromise on your own, so consider having a tax professional help you.
- Apply for hardship status — If the IRS approves your hardship status, collection activity will stop temporarily. To qualify for hardship status or currently not collectible status, you must prove that you don’t have the resources to pay for your owed taxes. The IRS will revisit your account approximately every two years, and if your income increases, you will have to pay your taxes in the future.
- Apply for innocent spouse relief — If your spouse understated taxes on your joint tax return and you weren’t aware of those errors, you may qualify for innocent spouse relief. This type of relief applies only to taxes due on your spouse’s income from employment or self-employment. It won’t apply to other types of taxes like those owed your own income, business taxes, or household employment taxes. After you file, your spouse or ex-spouse will have the option to participate in the process. The IRS may take up to six months or longer to review the application and send a letter of determination.
Research State Tax Payment Solutions
Most state tax agencies will work with you to create a payment plan that makes it easier to pay off your taxes. However, it’s important to note that most states don’t offer the same payment plans as the IRS, and states tend to want you to repay at a much faster pace than the IRS.
In most cases, you will need to have filed all of your tax returns to be eligible, and you will likely still pay penalties and interest until you have fully paid off your taxes.
Consider Alternative Solutions to Pay Your Federal and State Taxes
In addition to working with the IRS or your state tax agency, there are some additional solutions that can help you pay your taxes. Take a look at these options:
- Borrow Money — Paying your taxes quickly and in one lump sum means you won’t have to pay additional Failure-to-Pay Penalties and interest, which both accrue as long as you have tax debt. It will also help you avoid tax liens.
Borrowing money can allow you to pay off that debt immediately, and you will probably feel relieved that you no longer owe the IRS or the state money. Then, you can focus on gradually repaying the money that you’ve borrowed.
Consider whether any of your friends or family members might be able to loan you some or all of the money that you need. You might also explore the idea of taking out a personal loan. If you’re thinking about taking out a loan, consider whether the interest that you would pay on the loan is greater than the penalties and interest that you would pay on your outstanding tax debt.
- File for Bankruptcy — If you can’t pay your taxes and are considering declaring bankruptcy, it’s important to find out if your tax is dischargeable. Taxes can’t always be discharged during the bankruptcy process, meaning you might still be responsible for the tax debt even once you have declared bankruptcy.
The bankruptcy chapter that you are filing, the type of tax debt, and the age of your tax debt all factor into whether it can be discharged. It’s best to speak with a bankruptcy attorney to clarify your options, the pros and cons of bankruptcy, and whether your tax debt will be discharged.
- Wait out the IRS — This is not a great option, and it’s fairly hard to do if you want to have a job or investments. However, the IRS only has 10 years to collect tax debts. If you can fly under the radar for that long, your tax debt will effectively disappear.
Keep in mind that your options may vary depending on how much you owe. For example, if you can’t pay and you owe over $50,000, your options are different than if you can’t pay a bill that’s less than $50,000.
FAQs for People Who Can’t Pay Their Taxes
If you can’t pay your taxes, you probably have all kinds of questions. Here are some of the most common ones that we hear. If you don’t see your question, contact us today.
Will the IRS know if I don’t file my return?
Yes, the IRS receives data from your employer, clients who issue 1099s, and banks. The IRS will realize that you haven’t filed a return and can charge you a Failure-to-File Penalty. The agency can also file a return on your behalf and then demand payment of the tax due shown on that return.
Do I have to pay my taxes in one lump sum?
No, the IRS offers a long-term payment plan that allows you to make monthly payments. These monthly payments will gradually pay down your tax debt, and they may be easier to manage than one lump payment. Your state may also offer a payment plan.
Can the IRS garnish my wages for unpaid taxes?
Yes, the IRS can garnish your wages and can levy other assets. The IRS can also put a lien on your home or other assets. It’s important to find alternative arrangements and try to work with the IRS before any of these actions are necessary.
What if my loved one dies with tax debt?
If someone dies with unpaid taxes, their estate is generally responsible for the bill. In most cases, you cannot “inherit” a deceased person’s tax debt, but if you inherit assets with a tax lien attached to them, then, you may be responsible for the tax lien.
Are There Free Tax Relief Services?
There are ways to get free tax help if you’re struggling with a tax problem. Search for a low-income taxpayer clinic (LITC) near you, or visit the Taxpayer Advocate Service site. These programs have certain eligibility requirements, such as a low income or being age 60 or over.
Get Professional Help If You Can’t Pay Your Taxes
Navigating unfiled returns, delinquent taxes, incorrect assessments, and other tax issues can be confusing. That’s why it’s important to get professional help. The tax attorneys at the W Tax Group have extensive experience helping clients with unpaid taxes.
Let’s talk. Give us a call to set up a free consultation today. We will help you find the best solution and figure out what to do if you can’t pay your taxes.
