5 Tips if You Can’t Pay Your Tax Bill

Are you nearly or completely done with your taxes and completely stunned by the amount you owe? You’re not alone. Or, worse, do you find that you can’t pay the amount you owe? Once again: you’re not alone.

Every year, taxpayers find themselves in a situation where they simply can’t pay the amount they owe on April 15. If that happens to you, consider each of the following tips to make sure you don’t accidentally put yourself in an even worse position.

Tip 1: Don’t Make It Worse

Too many people compound their problem of not having enough money to pay their taxes by not filing their taxes at all. I’ll be blunt: that’s a bad strategy.

The penalty for not filing your taxes is significantly worse than the penalty for failing to timely pay your taxes. Specifically, the failure to file penalty is 5% of the tax owed per month it is late, but no more than 25%.

As an example, if you owe $4,000, can’t pay it, and don’t file your return for five months or more, you’ll owe a $1,000 penalty just for not filing!

For comparison purposes, if you file your tax return on time but don’t pay the taxes on time, the penalty is just 0.5% of the amount you owe per month. (You’ll owe interest in either case, as well.)

Tip 2: Get an Extension

If you can’t file a tax return, at least extend it. An extension is easy and automatic – with TurboTax Easy Extension. A properly filed extension creates a new filing deadline of October 15 and means you won’t owe a failure to file penalty.

To be properly filed, you must pay at least 90% of your total tax liability with your extension.  For example, say you paid $1,500 in federal withholdings throughout the year and you estimate you owe another $500.

In this case, your total tax liability is $2,000 ($1,500 + $500). For your extension to be valid, you must pay 90% of the total tax liability for the year, or $1,800 (90% x $2,000).

Since you’ve already paid $1,500 through withholding, the minimum amount you must pay to have a valid extension—and avoid the failure to file penalty—is $300 ($1,800 – $1,500).

Tip 3: Pay as Much as You Can

Like the old saying professes, don’t throw the baby out with the bath water. If you owe $2,000 but only have $750, pay the $750 you have.

Don’t skip paying anything because you can’t pay everything.

All of your potential penalties and interest are based on the amount you don’t pay, so the smaller you can make the shortfall, the less financial pain you’ll ultimately have to experience.

Tip 4: Request an Installment Agreement

For people who request permission to pay off their tax debt over time, the Internal Revenue Service (IRS) can be surprisingly easy to work with.

To start the process, use the Online Payment Agreement Application at the IRS web site. You’ll receive immediate notification of approval. If you have any questions, contact the IRS directly at (800) 829-1040.

The IRS has other payment programs that you might qualify for, depending on the severity of your situation.

Tip 5:  If you can, go ahead and file whether you can pay or not.  You still have until 11:59 to e-file your tax return and you will have one less thing to worry about.

Michael Rubin

Author of the bestseller Beyond Paycheck to Paycheck, and the upcoming The Savings Solution, Michael B. Rubin is a Certified Public Accountant (CPA) and a CERTIFIED FINANCIAL PLANNER professional. In addition to his experience providing sophisticated financial advice to affluent clients, Michael has been a key source of information for over a decade to countless others. He speaks passionately about and provides guidance on virtually all personal financial planning topics. Michael has appeared in various media, including radio and TV stations across the country, plus national media such as CNN Money.com, latimes.com, The Wall Street Journal, SmartMoney.com, Chicago Tribune, Financial Advisor Magazine, and Investment News. Prior to founding Total Candor LLC, Michael worked in the personal financial services practices of two of the former "Big Six" accounting firms. Subsequently working for several years as a new venture executive for Toys "R" Us, Inc., he made sure that he never actually grew up. He holds an undergraduate business degree from the Ross School of Business at the University of Michigan and an MBA from the Kellogg School of Management at Northwestern University. Michael lives in New Hampshire with his wife and children.

Comments (2) Leave your comment

  1. It would be nice if turbotax knew the rules of installment plans. They think it’s 36 month maximum when it is 72 months. Thank you turbotax, I wonder what else you got wrong!

Leave your comment* = required field