It can be a panicky feeling when income tax time rolls around and you find you owe more than you can pay. But there are a number of options to consider if you are in this position.
It might be tempting to try to avoid the problem by fudging the numbers or just not filing, but you may discover that the government, um, frowns on tax fraud. So it’s not such a great gamble to deceive your way through the situation.
As far as not filing at all, or just delaying filing until you can pay, the reason this is not a good idea is there are separate fees for paying late and for filing late. If you file on time without enclosing payment, then you’ll be incurring only one of these two types of fees. If you don’t file on time and you don’t pay on time, you’ll be incurring both.
The penalty for paying late is 0.5% of what you owe for each month or partial month (that’s in addition to the interest), with a cap of 25%. The penalty for filing late is 5% of what you owe for each month or partial month, up to five months. So definitely file on time if you can.
Furthermore, since your penalties and interest are based on the amount you owe, pay as much as you can when you file.
Let’s say you’re in a position where you owe $2,400, but the absolute maximum you can scrape together by April 15 is $1,800, and it’ll take you another three months to get the other $600. Leaving aside the possibilities we’ll talk about shortly, here’s what you would be looking at:
1. File in July and pay the whole $2,400 then.
You’d have a penalty of $36 plus interest of about $24 for paying late, and a penalty of $360 for filing late. So this option costs you $420.
2. File on time and pay the whole $2,400 in July.
You’d have a penalty of $36 plus interest of about $24 for paying late. So this option costs you $60.
3. File on time and pay $1,800 then, and pay the remaining $600 in July.
You’d have a penalty of $9 plus interest of about $6 for paying late. So this option costs you $15.
So file as soon as you can, and pay what you can as soon as you can.
Beyond what we’ve talked about, there are other points to consider if you’re unable to pay your taxes in full.
In order to not be penalized for filing late, you can submit Internal Revenue Service (IRS) Form 4868. If filed on time and correctly, this is pretty much a rubber stamp deal that gives you another six months. Remember though, that while this avoids the penalty for filing late, you still would have penalties and interests for paying late. So you want to not only file your 4868 by April 15, but pay as much as you can by then as well.
Or, there is another form, Form 1127, which requests an extension on the time to pay to August, which avoids those additional charges. Sounds good, but this one’s a lot tougher to have approved. You’ll have to give the good people at the IRS a thorough accounting of your assets and income, and convince them that you simply have no disposable income left after covering your essentials to live, and that there’s no way for you to realistically even borrow what you’ll need to pay your taxes.
If an extension isn’t enough, and it’ll still be a hardship for you to pay even after the extension period, you can file either to pay gradually in installments, or to pay a lesser amount.
To request to pay in installments, submit Form 9465. If you owe less than $10,000, it’s generally fairly easy to get this approved, but you don’t gain very much. You still end up paying the full amount you owe, and you still pay extra for paying late, though not quite as much as if you pay late without getting your installment plan approved.
To negotiate to pay a lesser amount, submit Form 656, called an “Offer in Compromise,” and accompanying documentation. This is much tougher to get approved, plus you pay a $150 application fee just to try.
The IRS can accept an Offer in Compromise if they are convinced that there is some doubt as to whether the assessed tax liability is correct, that there is some doubt as to whether the full amount of the tax debt would be collectible by the IRS due to your simply lacking the means to ever pay, or that there is reason to believe collection of the full tax debt, even if possible, would result in unacceptable economic hardship or would be unfair and inequitable, which comes into play most often for taxpayers who are disabled or elderly.
So panic is understandable, but you do have options if you’re struggling to pay your taxes.