What if You Can’t Pay?

Question:

You have completed your return. You owe more than you expected, and don’t have the cash to pay by April 15. What should you do?

Answer:

File your return anyway. There are two sets of penalties: Failure to Pay and Failure to File. The Failure to Pay penalty is 0.5% – 1% per month. The Failure to File penalty is 5% per month (up to 25%). Worst case, failure to file your tax return can result in criminal penalties, even jail time. So whether or not you can pay, don’t ignore your obligation to file.

What about the cash?

The cash shortfall will have to be dealt with. Filing your return will avoid the late-filing penalty, but interest will continue to add up on the unpaid balance. Do you have the ability to raise the funds? Do you have family who could make a loan? Do you have equity in your home to borrow against? If your cash shortage isn’t long-term, you might even consider putting the balance on a credit card.

IRS Installment Agreements

If you can’t come up with the tax and have no sources for a loan, the IRS has a procedure for requesting an installment payment plan. If you can’t pay in full, file your tax return on time and attach either a completed Form 9465, Installment Agreement Request, or your own written request for a payment plan, to the front of your return. (Specify the amount you can pay and the day you wish to make your payment each month.) You should pay as much as you can with the return, (to lower the interest and penalty charges). If you have already filed your return and have received a notice, or bill, requesting payment, you may attach a completed Form 9465 or your own request to the notice and mail it in the envelope provided. The IRS will let you know, usually within 30 days, whether your request is approved, denied, or if additional information is needed. If approved, a one-time user fee of $120 will be charged. However, if you agree to make your monthly installment payments electronically with direct debits from your bank account, the one-time user fee is reduced to $52.

Form 9465 is easy to complete. It does ask for your employer’s name and the name of your bank. Don’t hesitate to provide that information, they have it in their system already. If you can complete the repayment plan within 12 months, your request will almost always be granted. You will, however, still owe interest and penalties based on the underpayment of your income tax.

Way Over Your Head? Suppose your tax bill is extremely large, and your ability to pay is so limited, that you will likely never catch up. The IRS has a program for dealing with “economic hardship” called “Offer in Compromise.” This program is requested using Form 656. You will need to disclose all of your assets and provide the IRS with enough information to assess your overall financial situation. There are guidelines as to how much you can retain, but if you qualify, the IRS will establish a payment plan based on your ability to pay rather than the amount you actually owe. The rationale is that it’s better to make some sort of collection and keep a taxpayer solvent than to drive a taxpayer under and make no collection at all.

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