If you don't have enough money to pay your taxes, you have options. (pixabay.com)
Owing money to the Internal Revenue Service (IRS) is an awful feeling.
If you don't pay, you could face hefty penalties and interest charges. The IRS can garnish your wages, put a lien on your home and take other steps that will make your life very uncomfortable.
But you have options.
Here's a rundown of what you should and shouldn't do if you can't pay your tax bill.
What happens first
The IRS may send you a bill if you don't file a return. (Getty Images)
This year you have two extra days to file your tax return and pay anything you owe. Because April 15 falls on a Sunday, your returns won't be due until Tuesday, April 17.
If you ignore the date, a bad situation will only get worse, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.
"The IRS will send you a bill if you don’t voluntarily pay your taxes when they are due," he said. "If you ignore their bill, they will send you a second bill. If you ignore the second bill, the IRS will start the formal collection process."
Costly penalties and interest
Ignoring your tax bill will lead to interest and penalties. (pixabay.com)
If you don't file, and if you don't pay what you owe, it can get very costly.
First, there a “failure to file” penalty that accrues at the rate of 5 percent per month or part of a month on the amount of tax your return should show you owe, said Gail Rosen, a certified public accountant with Wilkin & Guttenplan in Martinsville. That penalty maxes out at 25 percent.
Then there's a "failure to pay” penalty. This accrues at the rate of .5 percent per month or part of a month on the amount shown as due on the return, Rosen said. This, too, maxes out at 25 percent.
If both penalties apply, Rosen said, the "failure to file" penalty drops to 4.5 percent per month (or part of the month) so the total combined penalty remains at 5 percent per month, and the maximum combined penalty for the first five months is 25 percent.
"Thereafter, the `failure to pay' penalty can continue at .5 percent per month for 45 more months — an additional 22.5 percent," she said. "Thus, the combined penalties can reach a total of 47.5 percent over time."
The penalties are in addition to the interest you will be charged for late payment, Rosen said.
"If you also missed estimated tax payments, an additional penalty is tacked on for the period running from each payment’s due date until the tax return due date," she said. "This interest is computed at 3 percent above the fluctuating federal short-term interest rate for the period."
The worst thing you could do
Don't hide your head in the sand if you owe money to the Internal Revenue Service. (pixabay.com)
The worst thing you could do is act like an ostrich and hide your head in the sand.
That means even if you don't have the money, make sure to file the return anyway.
The IRS receives W-2, 1099-Misc, 1099-Int, 1099-Div and 1099-B forms directly from the issuers, Kiely said.
"The IRS usually knows when you are required to file a return," he said. "If you don’t file, you may be accused of trying to hide and to evade paying your taxes."
Rosen said you shouldn't let your inability to pay your tax liability in full keep you from filing your return on time.
She recommends you include as large a partial payment as you can afford, and consider borrowing the funds for payment.
"Even filing without full payment can save you substantial amounts in filing penalties," she said. "More importantly, procedures exist for payment extension and installment payment arrangements which will keep IRS from instituting its collection process, such as liens and property seizures."
You can also use a credit card to make your payment, and while high interest rates and fees may not be idea, neither are penalties and interest from the IRS.
Learn more about how to pay on the IRS website.
Is an extension the answer?
An extension doesn't give you more time to pay what you owe. (Getty Images/iStock Photo)
No! An extension is not the answer.
It's actually just an extension of time to file your return. It is not an extension of your time to pay.
"An extension to file your tax return provides an additional six months from [the due date] to file your tax return," said Gerard Papetti, a certified financial planner and certified public accountant with U.S. Financial Services in Fairfield.
If you file a timely extension and pay at least 90 percent of the taxes owed, you may not face a "failure to pay" penalty if you pay the remaining balance by the extended due date, Papetti said.
There are times when you may qualify for an extension of time to make your payment, but you would have to be able to show "undue hardship.”
To establish undue hardship, Rosen said, it's not enough to show that it would just be “inconvenient” to pay your tax when due.
"Form 1127 is used to apply for an extension of time for payment of tax due to undue hardship," she said. "A statement of assets and liabilities must be attached as well as an itemized list of receipts and disbursements for the three months preceding the tax due date."
The IRS does offer payment plans for certain taxpayers. (pixabay.com)
The IRS does offer an installment payment option if you can't pay your entire tax bill.
You'd complete Form 9465 or you can apply for a payment agreement online.
The IRS charges a fee for installment agreements. The $120 fee would be deducted from your first payment after your request is approved. If a taxpayer pays from a direct debit from a bank account, the fee is reduced to $52, Rosen said.
If the liability is less than $50,000, you will not be required to submit financial statements, Rosen said.
Another option is a Full Payment Agreement (FPA), which if you qualify, would give you up to 120 additional days to pay the whole bill, Papetti said.
There is no additional fee to set up the FPA.
"With an FPA, however, interest and any applicable penalties continue to accrue until the amount you owe has been paid in full," he said.
The interest will continue to accrue under the installment plan, too.
"You will be charged interest on any tax not paid by the due date," Rosen said. "But the late payment penalty will be half the usual rate — .25 percent instead of .5 percent — if you file your return by the due date, including extensions," Rosen said.
If you decide to go for the installment plan, make sure you stick to it.
The IRS may modify or terminate an installment agreement if you miss an installment or fail to pay another tax liability when it's due. It can also change the agreement if you fail to provide an update of your financial condition when the IRS makes a reasonable request for you to do so, or if the IRS determines that your financial condition has significantly changed.
What about an Offer in Compromise?
It's not easy to negotiate with the IRS. (irs.gov)
An "Offer in Compromise" is a possibility for some taxpayers. That's when the IRS agrees to accept less than is owed.
Sounds great, but it's not easy to get.
Rosen said the IRS will consider this if a taxpayer is unable to pay the tax, if there is doubt as to the taxpayer’s liability for the tax, if collection of the full amount would cause economic hardship for the taxpayer or if a compelling public policy or equity consideration exists that may provide a sufficient basis for compromise.
There's also a streamlined "Offer in Compromise" program available for taxpayers with annual incomes up to $100,000. Those taxpayers also must have a tax liability of less than $50,000, Rosen said.
Do I need professional help?
You might want to work with a tax professional to get it right. (pixabay.com)
You may be able to fight with the IRS on your own, but you may find it will go smoother (and with fewer headaches) if you hire a tax pro such as a certified public accountant or a tax attorney.
If you go it on your own, here's what you need to know.
When you receive a bill in the mail from the IRS requesting an additional payment, the first question you should ask is, 'Why do I owe additional tax?' Kiely said.
"Frequently, the IRS will send you a bill based on incorrect or incomplete information," Kiely said.
He offered this example: Say you exercised non-qualified stock options. The gain in the options is added to your income, taxes are withheld and this information is properly reflected on your W-2. In addition, you are issued a 1099-B for the sale of the underlying stock, but you ignore the 1099-B because you paid the tax on the options.
"The IRS will look at the 1099-B, assume zero basis and a short-term holding period," Kiely said. "Then they send you a bill for thousands of dollars in taxes, interest and penalties."
The 1099-B should have been reported on Schedule D with no gain, he said.
So if you're confused about why the IRS said you owe the tax, ask a professional to help.
You could have a surprise
Don't lose your chance to claim a refund. (pixabay.com)
Even if you fear you will owe taxes, you should still file your return. Depending on your situation, you could be in for a pleasant surprise.
Some non-filers are actually entitled to refunds, Rosen said, and you don't want to miss out on an opportunity to get your money back.
"A return claiming a refund can be filed at any time, but only the tax paid within the three years before the return was filed can be recovered," she said. "A return filed more than three years late will likely be fruitless as a refund claim."
Don't ignore it
Ignoring a tax problem will only make it worse. (pixabay.com)
Tax liabilities do not go away by ignoring them, and the amount you owe will only increase. You will get caught.
Speak to a tax preparer to see your options and what you really owe. Then examine all your income sources to come up with the money. If you can't, consider asking for a hardship extension, or work with the IRS for an installment plan or Offer in Compromise.
"In many cases, these tax nightmares can be avoided by taking advantage of arrangements offered by the IRS," Rosen said.
Have you been Bamboozled? Reach Karin Price Mueller at Bamboozled@NJAdvanceMedia.com. Follow her on Twitter @KPMueller. Find Bamboozled on Facebook. Mueller is also the founder of NJMoneyHelp.com. Stay informed and sign up for NJMoneyHelp.com's weekly e-newsletter.