What Happens If You Owe More Taxes Than You Can Pay?


what happens if you cant file your taxes

That number on the line for taxes owed looks awfully big. It looks like more than you feel like you can pay right now. Should you panic?

No, no, you should not.

While the popular public image of the IRS is as a giant ogre, that isn't entirely true. The IRS actually has a relatively broad array of solutions for various circumstances. Contrary to popular belief, the agency does know it can’t get blood out of a stone. 

If that tax debt has made your eyes bug out and your heart race, take a deep breath and get a little Zen. Let's talk about your options.

How Much Do I Owe the IRS?

If for some reason, you aren't sure how much you owe, you can find out from the IRS.

  • Access your federal tax information through a secure login at irs.gov/account
  • From there, find your amount owed and the details of the balance.
  • If you want a printout, access GetTranscript to download or print your tax records.
  • View the critical information from the current tax year as you originally filed it.

In today's COVID-19, election-year, and disaster-saturated times, nobody could blame you for blocking out your taxes. There are ways to pay your debt without incurring horrendous damage.


But…the Penalties!

Yes, there will likely be penalties. And fees. And interest. However, there are actions you can take to minimize those. 

The absolute first thing to do every Tax Day is to File. Your. Taxes. Yes, go ahead and file, even if you can’t pay. Why? Because the penalty for not paying is much lower than for not filing. 

  • Penalty for not filing — 4.5% per month on the balance owed up to a maximum of 25% of the amount due.
  • Penalty for not paying — 0.5% per month on the balance owed up to a maximum of 25% of the amount due.

Big difference. At the very least, you can file for an extension. You will still accrue interest on your tax debt throughout the six-month extension, but you won’t pay a penalty.

Something else you can do to reduce your debt — pay as much as you can on time. One reason to do this is to reduce the amount that generates interest. Another is that it puts you in better with the IRS. If you go to the agency to work out a deal, paying something puts you in a better light than not paying at all. You get points for trying.

Begin paying toward the balance monthly at the least, understanding that interest and late payment fees continue to add up, especially if you aren’t on an IRS payment plan.

Wait! They Have Payment Plans?

Yep. The IRS offers short and long-term payment plans

A short-term payment plan gives you an extra 120 days to pay your taxes after tax day. Long-term plans can give you as much as 72 months (six years). Before you get too happy, remember that interest continues to accrue on the unpaid balance.

There are some provisos:

  • To qualify for any installment plan, you need to file and be current with all your tax returns from previous years.
  • The extension offer is based on your household income.
  • If you stop paying, the IRS can place a lien on your property, making getting a decent loan rate really difficult.

Other than that, you can apply for the payment plan that best suits your needs.

Short-Term Payment Plan

Really, it’s more like an extension, only you get four months instead of six. 

  • You have 120 days to make payment in full. 
  • There are no fees, but interest and penalties apply to the balance until it's paid off.
  • You are eligible if you owe $100,000 or less, including all taxes, penalties, and interest.

You still need to file on time, though. There’s always a catch.

Long-Term Payment Plans

Long-term payment agreements are the most common ones set up with the IRS. You have six years (72 months) max to pay off your tax debt. As noted above, it’s based on your ability to afford the payments, so you don't default. While you can specify the amount and the date for each monthly payment, there are still some restrictions.

  • The IRS expects payment on the date you indicate, so factor in mailing time. The recommendation is 10 days, but consider how your mail service runs where you live.
  • It’s available for people who owe $50,000 or less in combined taxes, interest, and penalties. 
  • If you want to save a little money, it’s cheaper to apply online than by phone or mail. 
  • If you need to restructure or reinstate an agreement, you pay a $10 fee online. 

The online fee for application and direct debit from a bank account is $31. If you set the plan up via phone or postal mail, the fee is $149. The current interest rate on payment plans is 3%.

Also, the late penalty amount drops from 0.5% to 0.25%, while the agreement is in effect.

But I Just Can’t Pay the Full Amount…

It’s OK. Stuff happens - 2020 is proof of that. You have a couple more options.

An Offer in Compromise (OIC) is an agreement between you and the IRS that allows you to pay less than the full tax liability by the expiration of the collection period. This means you don't have forever to request one. You should move quickly if paying in full isn’t possible without creating a financial hardship.

The application fee for an OIC is $205  unless you meet the low-income certification guidelines, in which case the fee may be reduced, waived, or reimbursed. If you are in bankruptcy proceedings, you are not eligible. The IRS considers an OIC when the amount offered represents the most they can expect to collect within a reasonable time.

Two other options are a hardship suspension and currently not collectible status.

A hardship suspension means you still need to file on time. Still, you get a temporary reprieve from payment due to extenuating circumstances. Interest, penalties, and fees will accrue.

Currently Not Collectible (CNC) status is the IRS term for your inability to pay in the foreseeable future. The IRS can approve and temporarily delay collection until your financial condition improves, but it doesn't make the debt disappear. You must provide proof of financial status, including all assets, monthly income, and expenses. 

P.S. You can’t go to jail for inability to pay taxes. Only if you lie, evade, or cheat could you face a (lengthy) federal prison sentence.


Written Notification

You don’t have to wait for the IRS to notify you that you owe taxes. If you already know you can’t pay, contact the agency or a tax professional as soon as possible to get something set up. However, if you do receive a written notice in your postal mail, Do. Not. Ignore. It. That’s bad.

On the other hand, know that the IRS does NOT ask for collection by email or phone. If you receive these kinds of notifications, it is a scam and safely ignored.

So, that’s what happens if you owe more taxes than you can pay. It isn’t the end of the world as we know it. But if you’re in this position, Top Tax Defenders is here to lend a hand. Contact us today to get the tax help you need.

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