Handling Taxes When You Can't Pay by the Extension Deadline
If you can't file your taxes by the deadline, you can get additional time by submitting a tax extension. However, additional time to file does not mean additional time to pay. You must pay your taxes by the extension deadline, but what if you can't?
You have several options when handling taxes if you can't pay by the extension deadline, including paying partially, setting up a payment plan, and even settling with the IRS to pay less!
What If I Don't Pay My Taxes?
Unfortunately, if you owe taxes, not paying them and ignoring the IRS only makes things worse. The IRS can charge penalties and fines, and even seize your property if you fail to pay your taxes and ignore their attempts to contact you.
Here is a brief timeline of all that the IRS can do if you decide to completely ignore your taxes and don't pay what you owe:
- Immediately: Penalties and interest start accruing on the taxes you owe on the very first day that your taxes are late. The current interest rate can be found on the IRS website. In addition, the IRS will charge you a 0.5% late-payment penalty that maxes out at 25% of your unpaid taxes.
- 1-3 months: Notices are sent from the IRS informing you that a balance is due. If there is a reason that you haven't paid your taxes, this is your opportunity to explain to the IRS why. If you can show reasonable cause or if this is your first offense, you may be able to get any penalties waived.
- 2-6 months: Tax liens If you ignore notices from the IRS, they may put a lien on your property. While this isn't a seizure of property, it may impact your ability to get other lines of credit and allow the IRS to claim some of the profits if the property is sold.
- 3+ months: IRS levies and passport restrictions At this point, the IRS may start to seize your actual property, including your car, real estate, or even garnish wages from your paycheck. In addition, the State Department may revoke or not renew your passport if your tax debt is over a certain amount.
The timeline for these events can vary based on how much you owe in taxes and when you start to receive notices from the IRS. In addition, while the IRS can pursue all of the actions above, they may not, depending on your situation.
Handling Taxes When You Can't Pay
Now that you know what may happen if you don't pay your taxes, the question becomes: what do you do if you really can't pay your taxes when you go to file a tax extension or even after filing an extension? The good news is you have plenty of options to avoid further pursuit from the IRS.
Pay 90% of Your Taxes
If you have the money to pay 90% of the taxes that you owe, you should consider doing so! While 10% of your unpaid taxes will accrue interest, you won't be charged the failure-to-pay penalty.
When you go to file your taxes, you'll avoid some of the penalties associated with not paying your taxes and have a much smaller tax bill to boot.
Get Your Tax Bill Under $10,000
Generally, If you owe less than $10,000 in back taxes, the IRS will probably not use tax liens or levies as a collection method. Therefore, it's always best to keep the balance of your taxes owed under $10,000 to avoid serious action by the IRS.
Apply for Penalty Relief
If you can't afford your tax bill and this is your first time missing your tax payment, applying for penalty relief from the IRS is highly recommended. If you are in good standing with the IRS, they typically offer first-time abatement, which waives penalties and fees for the first time you are late on a tax payment.
First-time abatement is usually one-and-done, so use it wisely. However, if you have a legitimate reason for not paying your taxes, you can still apply for penalty relief, but its much harder to get approved after the first time.
Set up a Payment Plan
If you can't pay your taxes all at once, the IRS does offer two payment plan options:
- Short-term payment plan The payment plan is 180 days or less, and the taxes owed must be less than $100,000.
- Long-term payment plan The payment plan can be longer than 180 days, but the taxes owed must be less than $50,000.
You will still accrue interest and may be charged penalties under a payment plan, so they won't save you money in the long-term. However, they do keep the IRS from escalating collecting your taxes and filing liens or levies.
Offer in Compromise
If you truly can't pay your tax debt, you may be able to negotiate with the IRS and settle on an offer in compromise. This allows you to pay less than the amount of taxes you actually owe in return for the IRS being able to collect the debt more quickly.
An offer in compromise can be a difficult process, and the IRS will thoroughly ensure you can't pay your taxes in full before accepting one. Therefore, it's recommended that you hire a tax professional if you plan on using this option.
Currently Not Collectible Status
If you have fallen on extremely hard times, you can apply for currently-not-collectible status. Your tax debt still continues to accrue penalties and interest, but the IRS will stop taking action to collect the debt. This is not recommended unless you truly don't have the money to pay your debt (as there is a lot you have to prove in order to receive this status).
Filing an Extension Helps Avoid Additional Penalties
While filing an extension may not give you extra time to pay your taxes, it does help keep your debt from getting bigger. Filing a tax extension helps you avoid the failure-to-file penalty, which is a whopping 4.5% of your taxes owed per month!
At IRSExtension.online, we help you file your tax extension correctly to avoid additional fees and penalties. Therefore, if you can't pay your taxes by the deadline, ensure that you file a tax extension by the deadline.
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