Hopefully you never find yourself unable to pay your tax bills, but you may still wonder: What if? So what does happen if you or someone you know can’t pay their taxes on time? There are a few options available in this situation.
Most importantly, don’t let the inability to pay your tax liability in full keep you from filing a tax return properly and on time. In addition, taking certain steps can keep the IRS from instituting punitive collection processes.
The “failure to file” penalty accrues at 5% per month or part of a month (to a maximum of 25%) on the amount of tax your return shows you owe. The “failure to pay” penalty accrues at only 0.5% per month or part of a month (to 25% maximum) on the amount due on the return. (If both apply, the failure to file penalty drops to 4.5% per month (or part) so the combined penalty remains at 5%.) The maximum combined penalty for the first five months is 25%. Thereafter, the failure to pay penalty can continue at 0.5% per month for 45 more months. The combined penalties can reach 47.5% over time in addition to any interest. This is why it is critical to file your tax returns on time, which avoids the “failure to file” penalty.
Undue hardship extensions
Keep in mind that an extension of time to file your return doesn’t mean an extension of time to pay your tax bill. A payment extension may be available, however, if you can show payment would cause “undue hardship.” You can avoid the failure to pay penalty if an extension is granted, but you’ll be charged interest. If you qualify, you’ll be given an extra six months to pay the tax due on your return. If the IRS determines a “deficiency,” the undue hardship extension can be up to 18 months and in exceptional cases another 12 months can be added.
If you don’t think you can get an extension of time to pay your taxes, borrowing money to pay them should be considered. You may be able to get a loan from a relative, friend or commercial lender. You can also use credit or debit cards to pay a tax bill, but you’re likely to pay a relatively high interest rate and possibly a fee.
Another way to defer tax payments is to request an installment payment agreement. This is done by filing a form and the IRS charges a fee for installment agreements. Even if a request is granted, you’ll be charged interest on any tax not paid by its due date. But the late payment penalty is half the usual rate (0.25% instead of 0.5%), if you file by the due date (including extensions).
The IRS may terminate an installment agreement if the information provided in applying is inaccurate or incomplete, or the IRS believes the tax collection is in jeopardy. The IRS may also modify or terminate an installment agreement in certain cases, such as if you miss a payment or fail to pay another tax liability when it’s due.
Avoid serious consequences
Ultimately, no matter how hard you try, you can’t just wish away tax liability. It’s important to timely address the tax liability to avoid further issues. If you can’t pay your taxes in full make, as large a partial payment as you can and start working with the IRS. Otherwise you may find yourself facing escalating penalties and having liens assessed against your assets and income. It could even lead to seizure of your property. The options discussed above are good ways to work to avoid these problems. Please contact your Rudler, PSC advisor at 859-331-1717 if you have any further questions on tax payments, or any other tax questions.
RUDLER'S TAX MANAGEMENT & PLANNING TEAM
This week's Rudler Review is presented by Becca Thorman, Staff Accountant and John Wood, CPA, CVA.
If you would like to discuss your particular tax situation, contact Becca or John at 859-331-1717.
Rudler PSC has established a Tax Management and Planning Team, a group of professionals who specialize in tax services. These highly qualified and experienced tax specialists meet on a regular basis to discuss upcoming client engagements, current issues relating to our clients and regulatory changes. Be sure to receive future Rudler Reviews for advice from our tax experts, sign up today !