What To Do When You Can’t Pay Your Tax Bill
Ready to file your federal tax return? If you know that you can’t pay up by Tax Day, April 15, file anyway. Penalties apply for failure to file and failure to pay. To reduce the hit to your wallet, file your return even if you’re going to owe and even if you know that you can’t pay. After you file, there are payment options available – and options when you can’t pay at all. Here’s what you need to know:
1. Pay by credit card. I’m generally not a fan of replacing one kind of debt with another. But if your ability to pay is a timing issue – as opposed to an “I absolutely don’t have it at all” issue – you can pay your federal income taxes by credit card. The Internal Revenue Service (IRS) accepts all major credit cards (American Express, Discover, MasterCard, or Visa). To make a payment, head over to the credit card payment page on the IRS website and choose one of the payment processors to pay online or by phone (if you’re paying by credit card and using e-file, your options are here).
The IRS doesn’t charge a fee for credit card payments. However, third-party credit and debit card providers may charge a fee, which may vary by provider, card type, and payment amount. Applicable fees for debit cards range from $2.00 to $3.95 while fees for credit cards range from 1.87% to 1.99% (minimum fees apply). Pay as much as you can upfront since you are limited to two credit card payments for individual income tax payments. If you’re paying more than $100,000 by credit card, call 1.888.734.8212; if you’re paying more than $500,000 by credit card, call 1.888.877.0450. If you’re paying more than $1,000,000, by credit call 1.888.889.7228 (you may also need a new tax preparer, just saying).
Remember, paying by credit card is a good option if you know you can pay the bill off eventually. Credit card interest and other fees can add up so if you know you won’t be able to pay off the balance at all, consider other options.
2. Refinance your home. Again, I’m generally not a fan of replacing one kind of debt with another (see #1) but even the IRS will recommend a re-fi to pay your taxes if you can afford it. If you have sufficient equity in your home, using that equity to resolve your outstanding tax debt may make sense. Mortgage rates remain relatively low which is good, but remember that the rules for deducting home mortgage interest when you refinance have changed, so don’t count on the offset. Also, if you’re already underwater, or headed that way, this isn’t a good option: you don’t want to lose your home over a tax bill.
3. Enter into an Installment Agreement. Consider an installment agreement with the IRS. An installment agreement lets you pay what you owe over time. Depending on how much you owe, you won’t even have to speak with a real person: if you owe $50,000 or less in combined individual income tax, penalties and interest, you can apply for an installment agreement online. You can also apply for an installment agreement by mail using federal form 9465, Installment Agreement Request (downloads as a pdf). Fees do apply. Keep in mind that it’s cheaper if you sign up online and even less expensive if you agree to pay by direct debit.
You must file all of your tax returns before you apply. The IRS will usually let you know within 30 days after receipt of the request whether it is approved or denied. The IRS will charge you interest while you’re paying your bill and may file a federal tax lien until you pay in full. The IRS may also seize your tax refund while you’re in repayment (but you know that could happen anyway).
If you owe more than $50,000 or your taxes are other than individual income taxes, the rules are a bit different: check with the IRS directly in that event.
4. Consider an Offer in Compromise (OIC). An OIC allows you to settle your tax debt for less than the full amount you owe. The IRS considers a host of circumstances including the ability to pay; income; expenses; and asset equity. Generally, the IRS will only agree to an OIC if they determine they will not be able to collect the amount due within a reasonable period of time. This option shouldn’t be your first choice and please don’t believe those TV commercials that swear you’ll be able to settle your tax bill for pennies on the dollar. Please do your homework before signing up with any company who promises you the moon in exchange for your check.
Lots of taxpayers have good reasons why they can’t pay their tax bills, and the IRS is looking for a really good reason before they cut you a break: most offers are actually rejected. As with any installment agreement, you must be current with all filing and payment requirements to apply and the IRS will return any newly filed OIC application if you have not filed your tax returns.
There’s a non-refundable fee of $186 to apply for the OIC. In addition, you’ll need to be prepared to submit a lump sum payment of 20% of your tax due or the equivalent of a monthly payment upfront. Also, penalties and interest will continue to accrue during consideration of the OIC.
While you can apply for an OIC on your own, I highly recommend that you consider a tax professional. If, however, you opt to try it yourself, use the IRS’ Pre-Qualifier online tool to see if you qualify and to calculate a preliminary offer amount.
5. Ask for additional time. Based on your circumstances, you may be granted a brief amount of additional time to pay your tax in full. You can make the request through the Online Payment Agreement (see #3) or by calling 1.800.829.1040.
6. Can’t pay at all? If you are insolvent or unable to pay due to circumstances beyond your control (for example, unemployment or disability), the IRS is willing to work with you. Give them a call at 1.800.829.1040 or use the phone number on any notice that you might have received in the mail.
If you’re not quite sure how much you owe for a specific tax year, you can check your balance due with a the online account tool available from IRS. You can also use the automated system available by phone at 1.800.829.1040.
Whatever you do, don’t ignore your outstanding tax bills. They won’t simply fade away. To the contrary, they’ll likely get bigger and Congress has become more aggressive with enforcement, authorizing private debt collectors and seizing passports for failure to pay. Take steps now to pay what you owe and avoid trouble down the line. Help is available.