Paying taxes is an obligation that every taxpayer must fulfill, but what if you find yourself in a situation where you can’t pay your taxes? It’s important to understand the consequences of failing to pay your taxes and explore your options.
Consequences of Not Paying Your Taxes
If you don’t pay your federal income tax on time, there are several penalties that will apply. Here are some common ones:
- Interest: Interest is charged daily until the amount owed is paid in full. The interest rate is determined by the IRS and varies depending on the current market rates.
- Late Payment Penalty: This penalty is 0.5% per month or part of a month that the tax remains unpaid after it’s due, up to a maximum of 25%.
- Failure-to-Pay Penalty: This penalty also applies when you don’t pay your tax by its due date, but it’s more severe than late payment penalties; it’s 5% per month or part of a month up to five months, making this possible for this penalty alone can add another 25%.
Options If You Can’t Afford Your Tax Bill
If paying your tax bill seems overwhelming with interest rate increases compounding over time along with delayed payments already accruing additional fees leading even deeper into debt then there may be several options available for individuals encountering these struggling stressors:
Request an Extension to Pay
You can ask the IRS for up to 120 days to pay your tax bill. This option is ideal if you need a short amount of time to gather the funds necessary to pay off your tax debt.
Payment Plans
If you’re wondering, “Do I have to pay my taxes all at once?”, the answer is no. The IRS offers several types of payment plans, including installment agreements, depending on your specific situation. They range from simple, streamlined agreements that can be set up online, to more complicated agreements that require you to submit documents showing your financial status.
Currently Not Collectible Status
If you can prove financial hardship – meaning you can’t pay the IRS right now – the IRS won’t ask you to payuntil your circumstances have improved. This option provides temporary relief and can be a lifeline if you’re facing severe financial hardship.
Offer in Compromise (OIC)
This is a settlement of your unpaid taxes for less than the amount you owe – if you qualify. An OIC is a more drastic measure and is typically used when taxpayers have few or no assets and have trouble paying their necessary living expenses.
IRS Payment Plans
The IRS offers two types of payment plans for taxpayers who can’t pay their taxes in full: short-term and long-term payment plans.
Short-term Payment Plan
The payment period is 120 days or less and the total amount owed is less than $100,000 in combined tax, penalties, and interest. This is a good option if you believe you can pay off your tax debt in a relatively short amount of time.
Long-term Payment Plan
The payment period is longer than 120 days, paid in monthly payments, and the amount owed is less than $50,000 in combined tax, penalties, and interest. This plan is ideal for taxpayers who need more time to pay off their tax debt.
Installment Agreement (IA)
If you request an IA, the time the request is pending pushes out, or suspends the running of, the initial ten-year collection period. This means that the IRS has more time to collect the tax debt, but it also gives you more time to pay it off.
The Importance of Taking Action
Whatever you do, don’t just ignore the taxes you owe. If you don’t make arrangements with the IRS to use one of the options listed above, the IRS can take money out of your wages (wage garnishing) or your bank account (levying a bank account), which can put you in a worse spot. The IRS can also issue federal tax liens that can destroy your credit and make it hard to sell property or obtain a loan.
Conclusion
Paying your taxes on time is crucial, but sometimes life’s circumstances may unintentionally prevent from happening so leading into greater financial strain when left unresolved as quickly and effectively as possible. Adopting a proactive stance towards understanding these consequences that arise making use of all available options and resources provide an effective path towards stabilizing oneself during such challenging periods- reducing unnecessary anxiety while mitigating future complications down-the-line. Note that should any certainty exist regarding being unable to pay linked debts then consulting a licensed professional would be advised before attempting any action regardless of how small it perceived by its initial appearances alone( as this could become much larger given enough time).
FAQs
Q: What happens if I can’t pay my taxes? A: If you cannot pay your taxes in full by the deadline (usually April 15th), you will owe both the unpaid tax and interest on the amount owed. In addition, you may face penalties for failure to pay and/or file your tax return, which can add up quickly over time.
Q: Will not paying my taxes affect my credit score? A: While unpaid taxes will not show up on your credit report like other debts might, a notice of federal tax lien may be filed against you if you don’t pay your taxes. This essentially means that the government has a legal claim against any property or assets that belong to you until the debt is paid off or otherwise resolved. The filing of a tax lien could potentially impact your credit score negatively.
Q: What options do I have if I can’t afford to pay my full tax bill? A: There are several options available if you cannot afford to pay your entire tax bill at once. You might consider setting up an installment agreement with the IRS or requesting an offer in compromise (OIC) depending upon individual circumstances. The IRS also provides some relief programs based on financial hardship situations; they are designed specifically for taxpayers who are experiencing economic difficulties beyond their control.
