We’ve all heard the common rule that you can’t access your IRA funds until age…
It’s a sinking feeling when you discover you can’t pay your taxes. It can leave you feeling stressed, anxious, depressed, angry, and a host of other emotions. Falling behind on your taxes can also impact your financial life. The IRS can seize your assets. Unpaid taxes can lead to fines and penalties, interest, and can lower your credit rating. A credit downgrade will lead to higher interest rates or even being denied if you should need a loan later.
There are many reasons why you may be unable to pay taxes. An unexpected expense may have come up, such as a medical bill. Or you could have recently lost a job you had or taken a pay cut.
Whatever the reason, there are things you can do to get out from under. Here are some things to do when you can’t pay your tax bill.
1. Don’t ignore the problem. Ignoring the problem isn’t going to help you at all. The problem also won’t go away on its own, it will only get worse. Instead, your best course of action is to face the issue head-on. Open any correspondence from the tax agency right away, so you stay informed.
If you’ve started filing your taxes, possibly with the help of online tax software or a tax service, complete the process. File your tax return even if you can’t pay the entire amount due, or request a valid extension. Failure to file a tax return itself can lead to penalties and interest, starting the day after your return is due. It can also lead to a penalty of up to 100% of the taxes due.
2. Try to relax. You may feel very panicky if you can’t pay your taxes, but remember that worrying only consumes your time and energy and doesn’t help. Being negative, panicky, or regretful leads to feelings of despair and can cloud your judgment. Those feelings may cause you to give up and let the tax bill grow, because you can’t see a way out. Instead, you need to try to relax, stay positive, and take action. Remember that many people have tax issues every year. You’re far from alone.
3. Contact the tax agency. The IRS has payment plans that they can offer, depending on your situation. Remember that the tax agency’s primary interest is in receiving the taxes you owe, even if it’s a partial amount or spread over time.
4. Negotiate an installment plan. If you owe less than $50,000 you may be able to file a form to request an installment payment plan. You may even be able to submit this form online without having to speak to anyone at the IRS. The IRS has recently started a plan, called the Fresh Start Program, which makes it easier to set up a payment plan and increases the amount taxpayers can owe before incurring a tax lien.
It’s important when setting up an installment plan that you don’t commit to a periodic amount more than you can actually pay. Falling behind or defaulting on payments will make the issue worse.
5. Offer a lesser amount. If you can’t make the full payment, you may be able to settle your tax liability by paying a smaller amount. This is called an Offer in Compromise. The IRS must determine that you can’t pay your full tax bill without hardship and you must meet certain other conditions. Interest and penalties will continue to accrue while your request is being processed.
6. Request an extension. As part of negotiating payment, you may also be able to request a short extension to pay your tax in full. This will give you some extra time to get the funds together.
7. Ask for leniency. If you have filed tax returns every year previously and have not had any penalties, the IRS may waive the penalty this time if you ask. Even if you have had previous tax issues, the IRS may waive the penalty if you negotiate a payment plan.
8. Think carefully before taking out loans or putting it on a credit card. You may be tempted to put your tax bill on a credit card or take out a loan. This may make sense if the interest on the credit card or loan is lower than the interest with the agency’s payment plan. Taking out a home equity loan is another option, again if the interest rate is lower. But if you already have other debts, this may make your debt problem worse. Likewise, withdrawing funds from your IRA or 401(k) can result in more taxes, as well as a penalty. In some cases, the agency payment plan may be most advantageous.
9. Consult a tax professional. A tax professional may be able to evaluate your situation and suggest options you’re not familiar with. But be careful as there are many unscrupulous firms out there. Seek recommendations from people you trust, and talk with the professional before doing business with them. Be especially wary of companies that require upfront payment.
10. Evaluate your income and spending. You will want to get your finances organized so you know exactly where your money is coming from and where it is going. This will help you identify financial problems, and see whether to work toward earning more money or cutting expenses. You will also want to have a budget so you can track your income and expenses, and an emergency cash fund so you can cover unanticipated expenses without incurring additional debt.
11. Cut your expenses as much as you can. Even if you’ve already cut items from your budget, by looking more closely you may be able to find more ways to reduce further. For example, some areas you could look at are