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Help! We Canít Pay Our Taxes!

Sometimes you know it’s going to happen. Sometimes it’s a shock. Either way, realizing you can’t pay your taxes on time can be a scary and stressful revelation. Below are several approaches for how best to pay the IRS, depending on how quickly you believe you will have the money. As with paying back loans, short-term solutions are less expensive and more favorable.

First, some general rules of thumb, regardless of the size of your tax obligation:

  • File your tax return, no matter what. Not only will this show you exactly how much you owe, but you will also avoid having to pay the fee for failing to file a tax return.
      
  • Don’t try and hide from the IRS. They are far more willing to work with those who are upfront about their financial situation and inability to pay taxes than they are with those who try and evade them.
      
  • Get free advice on how to proceed with paying your taxes and how to better plan for next year from a free tax clinic, often offered by universities or tax/financial institutions. You can also get free tax help from IRS-certified volunteers through the VITA, TCE, and AARP Tax Aide programs.
      
  • Beware of scams promising a quick fix to your situation. Research any company making promises that sound too good to be true.
      
  • Recalculate your withholdings. There’s a good chance too little was withheld from your paychecks throughout the year. You can fix this by filling out a new W4, opting for fewer allowances, and resubmitting it to your employer. Your paycheck will be smaller in the future, but you’ll decrease the chances of having a large tax bill come next April.

If you need 30 days to be able to pay the IRS:

File your tax return—on time!—and wait to receive a bill from the IRS, which usually arrives in the mail a few weeks after the filing deadline. Remember, the IRS will contact you through snail mail; any phone call you receive claiming to be from the IRS is a scam.

On your tax balance, you will also owe a monthly fee of 0.5% of your unpaid taxes, up to a 25% maximum. If you can show reasonable cause for your late payment, they could waive this charge.

If you know you’ll need these extra 30 days to come up with your taxes due but don’t file a tax return on time, you’re looking at a 5% monthly late fee, with that minimum jumping to $210 or your entire tax balance, whichever is less, if you don’t file within 60 days.

If you need 31 – 120 days:

If there’s a chance you won’t be able to pay your tax bill within 30 days of April 15, apply for an extension, which buys you up to 120 days to pay the IRS in full. You will still have to pay the monthly fee of 0.5%, but you won’t be under threat of the larger late fee quite as fast. See if you qualify to have all fees and interest waived through the IRS Fresh Start initiative.

If you need more than 120 days:

When it takes over four months to clear your tab with the IRS, there are a few different paths you can choose, but in general they will be more extreme and costlier in the long-run than the other payment period options. Carefully weigh the pros and cons of each method below before choosing one.

  • Installment agreement: Apply for an installment agreement (online or through Form 9465 or Form 433-F) for up to 72 months. There are fees for setting up a plan based on how you apply (online vs. paper), your income ratio to amount owed, and your payment method. Fees range from $31 to $225.
      
  • Credit card: In a very few situations, it may save you money to pay the IRS with a credit card, essentially transferring your balance owed to the credit card company. Be sure you understand the APR (interest rate) and terms on the credit card before to ensure this is the best option for you.
      
  • Offer in Compromise: Submit an Offer in Compromise application if paying your total tax bill would cause you and your family undue financial hardship. If you qualify, you may only have to pay back a fraction of what you owe, although there is a $186 application fee. Visit the IRS website to use their pre-qualification tool and see if you can have the application fee waived.
      
  • Request delay of collection: Similar to the Offer in Compromise, a delay of collection is intended for those who would not be able to afford necessities like food and housing if they paid their taxes all at once. You can submit this request over the phone at 1-800-829-1040, but this should be a last resort. A collection delay means the IRS can file a tax lien, which would significantly damage your credit score.