“Don’t panic.”
That’s one of the first pieces of advice the Internal Revenue Service gives filers who can’t pay their taxes. In addition to panicking, the IRS strongly cautions filers against delaying or neglecting to file entirely, as doing so can result in huge financial consequences.
If you’ve stumbled upon the jarring realization that you owe more taxes than you can pay this year, take comfort in the fact that you are not alone. “We often encounter clients who are unable to pay their tax bill on time,” says Lynn Ebel, manager at The Tax Institute at H&R Block. Major life events such as divorce, job loss, bankruptcy or tapping into a retirement account are often the culprits behind a failure to meet tax dues, Ebel says.
[See: Answers to 7 Burning Tax Questions.]
What happens if you don’t file your taxes? Though getting slammed with a heavy tax bill is never fun, delaying or neglecting to pay your bill entirely can make the situation much worse. We’ve listed the potential consequences for not filing your taxes below.
You’ll pay a fine. “Not filing a return by the April deadline is the costliest option,” Ebel says. Neglecting to file may result in a failure-to-file penalty, which amounts to 5 percent of what you owe for every month after the April deadline while you have an outstanding bill, up to a maximum of 25 percent. If your return is over 60 days late, the minimum penalty is $205 or 100 percent of the tax owed, whichever is smaller.
The IRS will file for you. “If you don’t file a return, the IRS files a ‘substitute for return’, which taxes you at the highest rate without deductions,” Ebel says. The IRS generates a substitute return based on information from other sources, such as your employer, without considering any additional expenses or exemptions you may be entitled to receive.
[See: 7 Most-Missed Tax Deductions and Credits.]
The IRS may seize your assets. After creating a substitute for return, the IRS may place a levy on your wages, bank accounts or retirement income, or file a tax lien against your property. A tax levy or lien typically won’t be removed until your bill has been paid.
Payment options if you can’t pay your taxes on time. You can dodge failure-to-file penalties and other undesirable consequences if you file your taxes on time. Plus, you can reduce interest fees if you pay as much as you can upfront. The IRS offers several options to taxpayers who owe but cannot pay the full amount.
1. Installment plans. If you owe $50,000 or less in combined tax, penalties and interest, you may request an installment agreement that allows you to make payments over time. If your installment plan request is approved, you can make monthly payments until your bill is paid. As of Jan. 1, 2017, the fee to set up an installment agreement with check, money order, credit card or payroll deduction payments is $225. The fee to set up a regular installment agreement with direct debit payments is $107. If you set up your agreement online through the online payment agreement, fees are notably lower — $149 for a check, money order, credit card or payroll deduction agreement, and $31 for a direct debit agreement.
2. Request a short-term agreement. Depending on your situation, you may be allowed additional time to pay your tax bill. If approved, you’ll be given an additional 60 to 120 days to pay, and may pay less in interest than if you set up an installment plan for a longer period of time. You may be eligible for a short-term agreement if you owe less than $100,000. You can request additional time through the online payment agreement application on IRS.gov.
[See: How to Reduce Your Tax Bill by Saving for Retirement.]
3. Pay with credit card. Though not the cheapest route, credit card payments are accepted by the IRS. Keep in mind that credit card interest rates are typically higher than the interest on IRS installment agreements, and you’ll be charged a fee of 1.87 percent to 2 percent, or 2.35 percent to 3.9 percent if you use tax preparation software. Paying with credit card is generally only advisable on cards with zero percent APR introductory offers, and only if you are sure you can pay off the bill before the introductory period ends.
4. Pay with a loan. As with using credit cards, taking out a loan is another acceptable, if pricey, option for paying your tax bill. Ranging from 6 percent to 25 percent, debt consolidation loan interest rates exceed the interest rates on IRS installment plans.
5. Request an offer in compromise. Based on your circumstances, you may be able to negotiate an “offer in compromise,” which is an agreement that would allow you to settle your tax bill for a reduced amount. To determine whether you qualify, the IRS will consider your ability to pay, income, expenses and asset equity. The IRS encourages filers to consider an offer in compromise as a last resort, as only applicants with special circumstances are accepted.
More from U.S. News
8 Ways You Can Prepare Now for Next Year’s Taxes
9 Red Flags That Could Trigger a Tax Audit
10 Tax Breaks for People Over 50
What to Do if You Can’t Pay Your Tax Bill originally appeared on usnews.com
