One in five Americans struggles to cover their federal tax bills.
Taxes may feel like just one more thing to add to your to-do list.
But for some people, they are profound sources of anxiety. What happens if you can’t actually pay what you owe the Internal Revenue Service (IRS)?
If you can’t pay your taxes, you go into IRS tax debt. This doesn’t mean that the IRS will waive this debt. It simply means that you will have to pay back taxes eventually.
What is IRS tax debt and how can you get out of it?
First things first, it’s important to get in touch with a licensed CPA right away. Then keep this guide on hand so that you understand your tax payback process.
What is IRS Tax Debt?
Each year, millions of U.S. taxpayers each shell out approximately $10,000 to the Internal Revenue Service (IRS). If you’re part of this taxpayer pool, this likely hits a bit close to home.
There are plenty of silver linings to filing taxes, however.
A large portion of taxpayers often receives a federal refund after filing their returns. And it’s possible to minimize your tax burden by taking advantage of various tax credits and deductions.
But plenty of taxpayers end up writing checks to the IRS, rather than the other way around. As tax bills change, the value of these checks can also fluctuate.
In some cases, taxpayers may be hit with tax bills they simply cannot pay. When you can’t pay your tax bill, you effectively go into IRS tax debt.
This means you owe the IRS your tax balance. You may also owe the IRS interest on your tax bill if you don’t pay over time. Taxpayers can also run into various penalty fees for tax debt.
Right now, if you fail to pay your taxes on time, or if you owe back taxes, you face a minimum of 0.5% interest on your balance. In May 2019, the interest rate was 6%. These rates change on a quarterly basis.
What To Do If You Can’t Pay Your Taxes
What should you do if you can’t pay your taxes? Follow this guide.
1. Consult a CPA
This is absolutely vital. Certified public accountants (CPAs) are here to help taxpayers navigate all steps of the tax process.
Working with a CPA can also ensure that you minimize your actual tax balance. Remember, IRS tax debt accrues interest and additional fees over time, depending on when you are able to pay back your taxes.
Every taxpayer’s financial situation is different. A CPA can work with you to come up with a plan for managing your tax debt, based specifically on your employment, family, and debt situation.
2. File Your Returns Regardless
People who can’t pay their taxes often assume they just shouldn’t file their returns. Don’t make this assumption! If you fail to file your federal and/or state returns, you face a pretty scary penalty.
The IRS failure to file penalty is equal to 5% of the unpaid balance, often per month. So if you owe the IRS $1,000, that’s a penalty of $50 a month!
You can still file your tax returns if you can’t pay your tax balance. Do it in order to avoid the failure to file penalty. And yes, your CPA can help you with this step.
How do you know how much you owe the IRS? This is something you figure out throughout the filing process. In terms of back taxes you owe, you may have a stack of bills accumulating from the IRS.
These bills will inform you of any unpaid tax balance. They may or may not accurately reflect your unpaid balance, however. Fraud and identity theft occur all the time, so work with a CPA to ensure these bills actually apply to you.
It’s also wise to view your tax account on the IRS’s website. Check in with this account regularly to make sure it accurately reflects your payback efforts.
3. Consider an Extension
You can request a filing extension to buy yourself a little more time. A short-term extension is 120 days (four months). There’s no fee to ask for this, but you will still have to pay interest on your unpaid taxes at 0.5%.
You can fill out an online application for this short-term extension or have a CPA handle it for you. Keep in mind that you will owe your full tax balance at the end of these 120 days.
In some cases, however, four months is simply not enough time. This is especially the case if you’re facing accumulating IRS tax debt from previous years!
In this case, you may be able to apply for what is called a hardship extension. This is a payback extension that pretty much tells the IRS that paying your taxes could cause severe financial hardship.
There’s no cost to request this, but you will still have to pay interest on your tax balance. Your CPA will help you decide if this is the best plan of action.
4. Set Up An Installment Plan
Believe it or not, the IRS is required to give consumers payment plan options for paying back taxes. Installment agreements give you a chance to pay back your tax balance on terms that suit your financial situation.
Yes, these plans do incorporate past tax balances you may owe. This means that you can whittle down your IRS tax debt by debiting monthly payments from a qualifying account.
You still have to pay interest on tax balances with installment plans. But these agreements give you an opportunity to pay back your balance in full under more or less comfortable terms.
5. Consider Penalty Relief
In some cases, you may be eligible for what’s called “penalty” or interest relief. This is where the IRS waives interest on your tax balance.
This can drastically reduce your tax balance, especially if you are working on past taxes. Your CPA can help determine eligibility.
It’s Time to Pay Back Taxes
If you have to pay back taxes, a CPA is your best resource. There are so many ways to get out of IRS tax debt, and choosing the right path out the gate can minimize interest and reduce your overall tax burden.
We’re here to help you get out of tax debt in as short a time as possible! Book your free consultation now.
