What If You Can’t Pay Your Taxes This Year?

can't pay taxes

Does your heart sink when you receive a piece of mail from the IRS?

That’s reason enough to dread tax season, but when I was growing up, my family always filed extensions on their taxes. This added to the stress of tax season. After April, 15th no one in my family would go to the mailbox.

I decided at age 18 I was fed up and wanted to start filing my own taxes. With a little help, I was able to prepare as soon as I received my tax documents. I never stressed again, because I had plenty of time to make adjustments.

If you’re finding yourself asking “What if I can’t pay the taxes I owe by this year’s filing deadline?” I can help! Here are a few guidelines for avoiding and reducing IRS interest, filing penalties, and underpayment penalties.

If you can’t pay your taxes, file your tax return and pay as much as you can by the tax filing deadline. Then, set up a payment plan with the IRS. You’ll still have to pay interest and penalties, but this will significantly reduce the total amount you’ll owe. Then make adjustments to your W-4 or quarterly tax payments so you can avoid owing taxes in the future.

File Your Tax Return (Most Important!)

Unless you made less than the minimum IRS requirement, you’ll need to file a tax return. Check out this article to find out the minimum income needed to file taxes.

If you find that you can’t pay all or part of the taxes you owe, you’ll still want to file your tax return by the deadline. Otherwise, you’ll be charged a penalty of 5% of the taxes you owe for each month (or partial month) after the tax filing deadline until you do. This includes a 4.5% failure to file penalty and a 0.5% late payment penalty.

If you go five months without filing, the failure to file penalty will max out. However, if you haven’t paid by then, the 0.5% late payment penalty will continue to accumulate until it also reaches 25%. At that point, your total penalty will be maxed out at 47.5% (25% late payment penalty and 22.5% failure to file penalty.)

If you file more than 60 days past the tax filing deadline, you’ll owe a minimum penalty of the lesser of $205 or 100% of the amount you owe.

You don’t want to end up in that situation, so plan ahead! Check out our Tax Preparation Checklist for help getting started.

Note that you can always file for an extension, but an extension of time to file doesn’t give you an extension of time to pay. If you owe taxes, you’ll start accruing interest and penalties immediately after the April 15th tax filing deadline. You can avoid the interest as long as you pay 90% of the taxes you owe by April 15th. Here’s what the IRS has to say about this.

Related: Last Day To File Taxes this Year (Don’t Forget)

Pay What You Can Without Compromising Basic Necessities

If you’re not able to pay the full amount of the taxes you owe by the tax filing deadline, the IRS will charge you interest on the outstanding balance. The interest rate is subject to change each quarter and is calculated by adding 3 percentage points to the federal short-term interest rate.

Paying as much as you can by the deadline is your best strategy. The more you pay towards your balance before it’s late, the less you’ll have to pay in accrued interest and penalties.

Here’s some more info from the IRS about penalties and interest.

Set Up a Payment Plan

As soon as you realize that you’re not going to be able to pay your taxes in full, you’ll want to reach out to the IRS to set up a repayment plan. Note that you cannot qualify for any type of repayment plan until after you have filed all of the required tax returns. Once you’ve completed this step, you’ll have the option of choosing a short-term repayment plan or establishing an installment agreement.

Here’s how to apply online for a payment plan with the IRS.

Short-Term Repayment Plan

If you believe you’ll be able to pay your balance in full within 120 days and you owe less than $100,000 in total (including taxes, interest, and penalties,) then your best bet is to file for a short-term payment plan. This won’t cost you anything other than the fees and interest previously mentioned.

With this arrangement, you can pay the amount you owe by check, pay online using the IRS Direct Pay system, or pay by debit or credit card.

IRS Direct Pay

With Direct Pay, the funds are pulled directly from your checking or savings account. You’ll receive an immediate confirmation when your payment is processed, and you can schedule your payments up to 30 days in advance. You can also cancel or change your payment up to two business days before the scheduled processing date.

Credit or Debit Card Payments

If you prefer, you can also make payments using your credit or debit card. The IRS allows you to process these payments online, over the phone, or even using your mobile device. While the IRS doesn’t charge a fee for this option, the credit card processors do.

Take a look at this page on the IRS website to learn more.

IRS Installment Agreement (Long-Term Payment Plan)

If you need more than 120 days to pay your balance and you owe less than $50,000 in combined taxes, interest, and penalties, you may qualify for a long-term payment plan, also known as an installment agreement. This will allow you to make monthly payments on the amount you owe. It will also decrease your failure to pay penalty from 0.5% per month to 0.25%.

If you owe more than $25,000 combined, you’ll have to pay by Direct Debit and have the funds automatically withdrawn from your checking or savings account each month. This is known as a Direct Debit Installment Agreement (DDIA). There’s a $31 set-up fee and you’ll still owe penalties and interest.

There’s also an option to pay using non-automated payments via Direct Pay, credit cards, check, or money order. This is only available to those who owe less than $25,000 and will cost you $149 to set up plus your interest and penalties.

Fill out IRS form 9465 or use the Online Payment Agreement Application if you owe less than $50,000. (You’ll find links to both here.)

If you will have $50,000 or more in tax debt you will need to include Form 433-A (Collection Information Statement or CIS) along with your Form 9465. If you owe more than $50,000, it’s recommended that you work with a tax professional as the CIS can be challenging.

Another option is to file an 843 Claim for Refund and Request for Abatement form. There are no direct standards for whether the IRS will accept or deny this request, but it’s worth giving a try. You never know where negotiating will take you and it may eliminate some of the financial burden. You can find this form and the instructions on this IRS webpage.

Related: (Don’t Risk it!) Get a Quality CPA to Prepare Your Taxes

How to Avoid Owing the IRS

While owing taxes to the IRS isn’t necessarily the end of the world, we can all agree that it’s a situation you’re better off avoiding. Luckily, there are some steps you can take to make sure you don’t find yourself in this undesirable position in the future. Two of the best options are adjusting your W-4 and paying quarterly estimated taxes.

How to Adjust Your W-4

One of the most common reasons why people find themselves owing money to the IRS is that they didn’t have enough withheld from their paycheck. Even if your withholding was once correct, major life changes like a marriage or divorce may throw this off. If you’ve started a side business, this will also impact the amount of taxes you owe. Whatever the reason, you can fix your withholding by completing a new Form W-4.

Before you do this, I suggest using the IRS Tax Withholding Estimator. Then, once you’ve determined the appropriate withholding amount, complete the Form W-4 Employee’s Withholding Certificate and provide it to your employer. (You can get a W-4 from your employer or download it from the IRS here.)

How to Pay Quarterly Taxes

If you have a significant amount of income coming in from your side business, then there’s a good chance you’ll owe extra taxes. While it would be easier to calculate it at the end of the year and make one lump-sum payment, income taxes are a pay-as-you-go system. For this reason, you’ll need to estimate the amount of taxes you owe each quarter and send a payment off to the IRS.

Related: Am I Required to Make Estimated Tax Payments on Extra Income

The schedule for making estimated tax payments is as follows:

  • Taxes owed on income earned between January 1 to March 31 is due on April 15
  • Taxes owed on income earned between April 1 to May 31 is due on June 15
  • Taxes owed on income earned between June 1 to August 31 is due on September 15
  • Taxes owed on income earned between September 1 to December 31 is due on January 15 of the following year

Note that if any of the payment days fall on a legal holiday or a weekend, the payments are due on the next business day.

You should submit Form 1040-ES along with your payment, or, even better, pay online at EFTPS.gov& or pay with your mobile device using the IRS2GO app, which you can download here.

The Bottom Line

If you’ve found yourself in a situation where you owe the IRS and don’t have the money to pay it all at once, don’t panic. Make sure to file your return on time so you can avoid the 5% per month failure to file penalty. Pay as much as you can afford by the tax deadline to reduce the amount you’ll pay in penalties and fees, and set up a short-term or long-term payment plan to further reduce your failure to pay penalties.

Finally, consider adjusting your W-4 withholding amounts and/or making estimated tax payments to ensure you don’t find yourself in the same situation again in the future.

What If You Can't Pay Your Taxes This Year?

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About Ashley Chorpenning

Ashley Chorpenning is a millennial money expert, freelance writer, and marketing strategist. Her work can be seen at Quicken Loans blog, Bigger Pockets, AAA Insights, Credit Karma, and more.

Comments

  1. This was the first year I got a refund in a few years, thanks to getting married, but when I had to pay I always planned ahead to avoid any late payments or partial payments. I always set aside money into savings outside of my emergency fund, so if a big bill comes, from the IRS or otherwise.

  2. Kevin | Central Carolina Scale says

    I found your site a few weeks ago PT and I’ve enjoyed going through and reading some of your past articles. Thank you for the helpful info!

  3. Philip Taylor says

    Good advice, Jon. Thanks for dishing out some free money wisdom. 🙂

  4. Jon | Free Money Wisdom says

    Yes, follow the IRS guidelines, they are not something you want to mess with. They will hunt you down to find the last penny they deem they are owed. Get on a payment plan and make that your focus for your personal finances.