What to Do if You Can’t Pay Your Income Tax
Financial reversals and high unemployment may leave a number of people in the unenviable position of being unable to pay the Internal Revenue Service all the tax they owe.
Their first inclination may be to ignore the problem and hope it will go away. Frequently they’ll wait to file tax returns until they have the money, said Jan Gribbon, an IRS spokeswoman.
But this is the worst--and most dangerous--response. When you fail to file a tax return, you incur a 5% per month penalty in addition to interest. In other words, if you owe $1,000 and file your return two months late, you’ll owe $1,000 plus a $100 penalty, plus interest.
So what can you do?
First, you should double-check your return to make sure you’ve calculated everything properly and taken advantage of every tax break available. Tax filing is complicated, so mistakes are easy to make. A common mistake is failing to claim the earned income credit, which can provide astounding savings to low-income families.
If you’re not sure whether you’ve prepared the return correctly, it may be worth having it reviewed by a professional. Typically this will cost you between $35 and $100. If you don’t have enough money to pay a professional tax-preparer, you may be able to get help through the Volunteer Income Tax Assistance program--VITA for short.
VITA is a nationwide program often sponsored by colleges, community and senior citizen groups, in which professional preparers donate their time to help low-income and elderly people file returns. The service is free and surprisingly easy to find. Taxpayers can call 1-800-TAX-1040, and an IRS operator will direct them to VITA programs in their area. In many areas, the programs are available on weekends and in the evening.
Once you’ve determined that the return is correct, you need to file--on or before April 15.
What happens if you owe and you don’t have enough money to pay? Send what you can with the tax return and include a note saying why you didn’t send the rest, said Michael J. Lichner, tax director at the Los Angeles accounting firm of BBDO Seidman.
The IRS will penalize you, but the penalties for failing to pay are far less severe than for failing to file. Failure-to-pay penalties amount to one half of one percentage point per month. So, using the same example as before, if you owed $1,000, filed your return, but didn’t pay the tax for two months, your penalty would amount to $10 plus interest.
About six to eight weeks after filing your return, you should get a bill from the IRS requesting the remainder of the money. If you have it by then, send it. If you don’t, the letter will include a phone number you can call to make an appointment with a collection agent.
There are essentially two options at this point. If you believe that you’ll have enough cash to pay the tax within 60 days, you can usually tell the agent that over the phone, and he will wait to bill you again until that time. Interest and penalties will continue to accrue for as long as you owe the tax, but further IRS action will be forestalled, Gribbon said.
If you think you’ll need longer to pay, you’ll need to work out a payment plan. Typically, taxpayers must fill out a financial statement in order to apply for a payment plan. Even then, a payment plan is not guaranteed. If your financial statement shows that you have assets that can be sold or borrowed against to pay the tax, the IRS will ask you to do so.
Additionally, the agency is far more accommodating to those who have never before been delinquent with tax payments than they with habitual late-payers, Gribbon says. If this is the first time you’ve had a problem paying, the IRS is likely to work out an arrangement. If this is an annual problem, the agency is much more likely to compel you to start selling assets to pay your tax immediately.
It’s also important to note that if you owe more than $2,000 for more than 60 days after you get the bill, the IRS is required, said Gribbon, to place a lien on your property--not exactly good news for your credit rating. Unless your credit rating is shot, you should make every effort to get your bill below that $2,000 threshold--even before working out a payment plan.
