What to Do if You Can’t Pay Your Taxes
Tax season is stressful for everyone. But it’s especially difficult for those of us who can't afford to pay the IRS. Fortunately, there are several ways to make an unmanageable tax obligation easier to handle. Many aren't all that expensive, either.
Which approach is best depends largely on how long you’ll need to come up with Uncle Sam's cash. Naturally, the short-term solutions are far more attractive than the options available to folks with more serious financial difficulties.
Here's what to do if you can't pay your taxes:
- Universal Tip: File a return no matter what.
- If You Need 30 Days: Wait for a bill and pay a 0.5% monthly fee.
- If You Need 31 – 120 Day: Get a 120-day extension. Pay a 0.5% monthly fee and ~4% APR.
- If You Need 121+ Days: Consider an installment agreement or pay with a credit card.
Continue reading below to learn more about these strategies and the other options available to people who can't pay their taxes by April 15. You can also check out our Ask the Experts Q&A for more insights from tax professionals.
- Don’t Try to Hide: You’re simply not going to slip through the cracks. And the IRS has proven far more willing to work with people who are straightforward about their inability to meet tax obligations. So submit your return by the April 15 deadline even if you don’t have the money to pay and open a dialogue with the IRS regarding your status.
- File a Return No Matter What: The IRS charges two different fees for failing to pay taxes and failing to file a tax return. At minimum, you want to avoid the latter if you can help it.
- Leverage Free Advice: You’re already on the right track by researching your options online, and we highly recommend that you continue. For example, many universities have free “tax clinics” staffed by third-year law students. Many experienced accountants and lawyers offer free consultations. And you can get free tax help from IRS-certified volunteers through nationwide programs such as VITA, TCE and AARP Tax Aide.
- Watch Out for Scams: There are plenty of businesses promising miracle fixes to even the most severe tax problems. Be intensely skeptical of these. Make sure to thoroughly research anyone you consider working with before enlisting their services. And remember, if an offer sounds too good to be true, it probably is.
Reevaluate Withholdings: A large tax bill in April could mean that too little was subtracted from your gross pay during the year. In other words, you were getting a bigger paycheck from your employer in exchange for a higher tax bill when you file your return.
To fix this, fill out a new Form W-4, opt for fewer allowances and submit it to your employer. Your paycheck will be smaller, but you’ll be far less likely to have a surprise tax bill, too. You may even get a refund.
- Improve Your Budgeting: Owing money to Uncle Sam underscores the importance of financial planning and a carefully constructed budget. So take this opportunity to cut your spending on everything but the necessities, and keep close track of your performance. This will help you build positive habits for the future and repay the IRS as quickly as possible.
If You Need Up to 30 Days: Just Wait for a Bill
If a temporary cash-flow interruption is the cause of your inability to pay, you should still file your tax return on time and simply wait to receive a bill from the IRS. They notify people who have tax balances due, including interest and late fees, a few weeks after the April 15 filing deadline. It takes a bit of time to process the initial returns, after all.
The IRS currently charges a monthly fee equal to 0.5% of your unpaid tax balance, up to a maximum of 25%, if you do not pay by the deadline. That’s a fairly small price for a bit of extra time. Plus, if you can show cause for your late payment, the charges could be waived.
You should use this strategy only if you literally need two to three extra weeks to pay. It would take the IRS 10 days to process a request for an extension or payment plan, anyway. But it’s best not to get on the agency’s bad side.
That said, it’s worth reiterating the importance of filing a return on time no matter what. If you don’t, that 0.5% monthly late fee skyrockets to 5%. And if you don’t file within 60 days, the minimum late-filing penalty will be $210 or your entire tax balance, whichever is less.
If You Need 31 – 120 Days: Apply for an Extension
The IRS offers 120-day payment extensions. You won’t need an installment agreement, but you will have to pay a monthly penalty equal to 0.5% of your balance (up to a maximum of 25%).
Qualifying individuals may be able to get fees and interest waived through the IRS Fresh Start initiative.
If You Need 121+ Days: Weigh Your Options
People who need more than four extra months to pay their taxes have several options, some of which are much more extreme than others. The key is to weigh the pros and cons of each as they relate to your particular situation.
Set up an Installment Agreement with the IRS: You can apply for the ability to pay off your tax obligation in up to 72 monthly payments. You can do so online if you’ve already filed your tax return or by completing one of two forms, depending on how much you owe. Use Form 9465 if you owe less than $50,000 (principal plus fees and interest) and Form 433-F if you owe more.
Bear in mind that there’s a fee for setting up a payment plan. The amount varies based on how you apply (online vs. paper form) as well as your chosen payment method:
Online Payment Agreement Form 9465 / Form 433-F Direct Debit from Bank $31 $107 Check or Payroll Deduction $149 $225
If your income is equal to or less than 250% of the applicable poverty guideline, you can use Form 13844 to request a reduced fee of $43.
It’s also worth noting that the IRS doesn’t usually attempt collections while an installment agreement application is being considered, when such an agreement is in effect, or for 30 days after an application has been rejected.
Use a Credit Card: In certain situations, paying off your tax obligation with a credit card can save you money. It also shifts your debt from the IRS to your card’s issuer, which might give you some peace of mind.
You can learn more from WalletHub’s article on the Pros & Cons of Paying Taxes with a Credit Card.
Submit an 'Offer in Compromise': If paying your full tax bill, would cause undue financial hardship, this negotiation instrument will allow you to repay less than you actually owe. However, you will have to pay a $186 application fee and make a sizable up-front payment, unless you meet the IRS's Low Income Certification guidelines (see Section 1 of Form 656).
You can find instructions for how to apply for an offer in compromise here. But before you apply, it’s a good idea to use the IRS’s Offer in Compromise Pre-Qualifier tool to find out if you’re eligible.
Tap into Your 401(k): There are two ways to leverage retirement savings for tax payments: borrowing from your funds or withdrawing them entirely. Borrowing is definitely the preferred option, as it doesn’t trigger the 10% early-withdrawal tax penalty for people who are younger than 59½.
However, you will have to repay yourself with interest within five years. And there’s a limit to how much you can borrow, depending on how much you have invested. But as long as the rate is decent, this could be a good option.
Use a HELOC: A home equity line of credit (HELOC) could help you pay off your IRS obligations inexpensively, depending on the terms. You can compare HELOC offers on WalletHub to find the best deal.
But remember that this is a very risky route to take because a failure to repay your HELOC balance could cost you your home.
- Sell Assets: Divesting yourself of certain assets is a straightforward yet potentially painful way to raise money to pay your tax liability. This option should be a last resort.
- Ask to Temporarily Delay Collection: If paying your taxes would prevent you from affording daily necessities such as food and housing, you can ask the IRS to wait until your financial situation improves. You can make this request by calling the IRS at 1-800-829-1040, but we don’t recommend doing so. A temporary collection delay allows the IRS to file a tax lien, which can significantly damage your credit score.
At the end of the day, it’s important to reiterate that trying to hide from the IRS is the worst way to handle an inability to pay. The IRS is much more likely to work with people who are upfront about their situation. And there are indeed a number of ways to buy yourself some extra time without doing too much damage to your bank account.
Ask The Experts: Tips From Tax Pros
For additional insight regarding the steps consumers can take if they don't have the funds to pay the IRS, we turned a panel of accounting and tax professors. You can check out their responses to the following questions below.
- Do you have any tips for people who lack the funds needed to pay an upcoming tax obligation?
- Is it ever a good idea to tap into a 401(k) or other retirement account to satisfy tax obligations?
- What tips do you have for people who want to make sure they have enough money to pay their taxes in the future?
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