Oh no, you’ve prepared your tax return and you owe taxes. What can you do?
Not paying your taxes by the due date will garner you a failure-to-pay penalty of ½ of 1% of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty accumulates, month by month, and can grow to be as much as 25% of your unpaid taxes.
Don’t think you can escape penalties by not filing. If you don’t file, you’ll owe a 5% per month penalty for not filing. For any month that the failure-to-file penalty and the failure-to-pay penalty both apply, the 5% failure-to-file penalty is reduced by the failure-to-pay penalty.
If you have a really good excuse for why you couldn’t pay by the tax deadline, you may not have to face a failure-to-pay penalty. So if you file your tax return on time, and can show that you failed to pay on time because of reasonable cause and not because of willful neglect, let the IRS know.
You will also incur interest on any unpaid tax from the due date of your tax return until the date of payment. The interest rate is determined quarterly and is the federal short-term rate plus 3 percent.
If you can’t pay all the taxes you owe, file your tax return on time and pay as much as you can, then explore other payment options. Believe it or not, the IRS is willing to work with you to devise alternate payment options. Here are a few:
Installment payment plan. If you owe $50,000 or less, you can request a payment plan when you are preparing your taxes with TurboTax or call 800-829-1040. If you owe, the IRS will also send you a bill with your payment options which include instructions for requesting an installment agreement. If you owe more than $50,000, you will need to complete a financial statement to determine the monthly payment amount for an installment plan.
Hardship cases. If you will become destitute if you have to pay the taxes, you can fill out Form 911, Request for Taxpayer Advocate Service Assistance, to ask the IRS to delay tax collection. This isn’t your best option, since you’ll still be racking up penalties and interest and the IRS can file a lien against you.
Offer in Compromise (OIC). If none of these options work for you, you can make an offer to settle with the IRS for something less than is due. You’ll have to fill out Form 656 and show that you are unable to pay, for example, the amount owed is higher than your total assets and income.
If you can’t pay your tax, don’t bury your head in the sand — hiding from the IRS is not a successful strategy. It’s best to file your taxes by the tax deadline and then work out one of these payment options with the IRS.