What Happens if I Can’t Afford to Pay My Taxes? Read Our Step by Step Guide on What to Do
Everyone, take note: 2018 tax returns are due by April 15, 2019.
The end of 2018 is just a few weeks away, and before you know it it’s already time to settle your taxes. It’s better to prepare in advance if you can pay your full taxes on time or if you’ll need a contingency plan.
Check Your New Income Tax Bracket
The first step is to check your 2018 income tax bracket to see where you fall under Trump’s Tax Jobs and Cuts Act of 2017. Generally, there are decreased tax rates across all seven brackets for each filing status.
Unfortunately, there are no personal tax exemptions for 2018.
However, you can avail of one of the two types of tax deductions, whichever will result in a lower taxable income: standard deduction or itemized deduction. Also, blind and elderly taxpayers will enjoy an additional $1,300 tax deduction, and another $300 if they are not married.
Once you have an idea of your expected tax bill which should be paid before the April 15 deadline, make sure you start preparing and file your taxes. Failing to do so will result in corresponding penalties.
What happens if I can’t afford to pay my taxes?
Even if you can’t afford to pay your taxes in full by April 15, it’s important that you file your income tax return.
Unless you want additional fees on top of interest rates on your outstanding debt amount, it’s best to calculate and file the correct income tax return. You might be eligible for tax deductions, credits, or refunds, so be sure you verify all information needed to compute your tax.
If you don’t file, you will be charged with a failure-to-file penalty equivalent to a monthly fee of 5% of your total tax, up to 25% of the whole taxable amount. If you file later than 60 days past the deadline, you will also be charged with $135 or 100% of your tax (whichever is lower) on top of the monthly fee. If you DON’T pay your taxes, that’s a whole other story.
Here’s what happens when you don’t pay your taxes
- Immediately after the April 15 deadline, charges and interests will start running. The annual interest rate is usually 5%, with an additional 0.5% (up to a maximum of 25%) monthly late-payment penalty.
- You will receive notices reminding you to pay your taxes. The IRS may send you a tax lien or a legal claim to your assets. Although this doesn’t equate to the seizure of your assets, these could affect your ability to get a job, get loans, acquire or sell properties, or get security clearance and will be on your permanent public records.
- The IRS can send your account to a private collection agency, or in some cases, escalate your account to a revenue officer to personally collect taxes.
- If you let the months pass without settling your tax bill, two other things may happen:
a. The IRS can go after your assets- social security payments, bank accounts, paychecks, and properties which they can seize, liquidate, then deduct from your tax liabilities, or
b. The State Department can deny you when you apply or renew your passport. Or worse, they can even revoke your passport.
- The worst case scenario, you will be charged with tax evasion.
Many people are afraid of IRS audits because of major mistakes in declaring relevant information can result in incorrect tax returns and even tax evasion charges. That’s why it’s important to file your taxes accurately and on time; even when you can’t pay full by April 15, 2019.
Don’t worry; the IRS offers solutions because they would rather have your money in trickles rather than not at all.
What you can do if you can’t pay your taxes on time
Figure out how much of your total taxes you can pay
After filing your tax return, carefully assess your current financial situation and figure out how much you can pay by the deadline. If you have any other debts, take these into account as well. If you are unable to pay the full amount immediately before the deadline but can do so within 120 days, the IRS can grant an extension. Applicable fees and charges accrue until the debt is paid off.
Explore the different payment options offered by the IRS
You can apply for an Installment Agreement Plan if you are eligible:
- If you owe $25,000 or less
- Have not had an installment agreement in the past five years
- Able to prove you are not financially capable of paying your tax
- Able to pay within three years or less.
If you are eligible, file a form 9465 with the IRS and pay a fixed monthly fee within the agreed period of payment. Just make sure that the amount stated in the agreement is feasible for you to pay monthly until the end of the period.
Explore the different alternatives offered by the IRS
An Offer in Compromise is a settlement for less than the actual taxes you owe. The IRS grants this to eligible taxpayers who are having trouble with their finances and necessary living expenses. Generally, when you are negotiating your taxes, your payment offer should at least be equal to your net worth, which is your assets minus your debts. To know if you qualify for this alternative, you can use the OIC pre-qualifier tool.
Another option is to request for the IRS to grant you a “temporary delay in collection.” They will determine if you really can’t pay any amount at all due to your current financial status. They can suspend current collection actions, but that does not mean the debt and the applicable penalties go away. It just means that the IRS will temporarily delay tax collection until your financial situation improves.