You have just finished preparing your tax return and notice that you owe Uncle Sam a hefty sum, but you cant afford to pay it. Are you going to jail? Probably not. The realization that you cant afford to pay your taxes can make you feel uneasy, but dont worry, there are some actions you can take to remedy the situation.
Send in Your Return
Even if you dont have enough money to pay the taxes due, you need to send in your return by the filing deadline. While there is a bit of a penalty for paying late, the penalty for filing late is much more severe. So, no matter what the situation is, file your taxes by the deadline.
Try to Find the Money
Whether you owe $100 or $10,000, the first thing you should do is try to find possible sources to obtain this money. Consider the options available to you such as equity in your home, credit cards, savings, or cashing out paid time off at work. There are a lot of sources of potential money, but some may end up costing even more in additional interest.
If You Just Need a Little Time
While it is best to pay the taxes you owe in full and on time, there are times when all you need is to get your next paycheck or wait a few weeks until the money is available. If you filed your taxes on time, the IRS will send you a letter in the mail stating how much you owe plus any additional interest.
If you know youll have the money shortly after the filing deadline it may make sense just to wait until they send you the bill and pay it then, as the interest you pay will be relatively low compared to financing the money with another source. This certainly shouldnt be a long term solution and your goal should be to pay the IRS as soon as possible.
Consider an Installment Plan
The government, just like anyone else, would rather get the money over a period of time as opposed to not at all, so they do have an installment plan available when you cant pay in full. To request an installment plan, you should use Form 9465. You can even set this plan up to do a direct debit from a bank account to make the process even easier.
If Even an Installment Plan Wont Work
So, you cant find the money and you cant even get on an installment plan, what are your options? A final option offered by the IRS is called an Offer in Compromise. Keep in mind, this is only for extreme circumstances.
If you request an offer in compromise, you can offer to make either a lump-sum payment or fixed payments over a short period of time. This process requires you submit a complete personal financial statement and an application fee of $150 in addition to Form 656.
These offers are evaluated on a case-by-case basis and you may or may not be approved. If the IRS determines from the information you have provided that you are unable to pay the amount in full, the offer may be accepted. Even if it is accepted, you agree to pay your taxes in full and on time for a period of five years after the offer is established.
Evaluate Your Options Carefully
Paying the taxes you owe is very important, so it is vital that you explore all of your options before jumping to conclusions. Above all, file your return on time to avoid the late filing penalty. Then, take the time to consider how realistic it is for you to pay your taxes and what options are available to you.