Filing taxes is an essential aspect of life. However, for many of us, the process is fraught with anxiety. In particular, tax season can be stressful when unforeseen circumstances prevent us from paying what we owe the IRS. The current COVID-19 crisis is one such scenario. As of this writing, more than 22 million people are unemployed. Although some states are reopening their economies and others haven't shut down at all, there's no question that COVID-19 has disrupted labor markets across the United States.
When you find yourself in the difficult position of not being able to pay your taxes, there are options to ease the pressure. In this article, we discuss the actionable steps you can take when you come up short during tax season.
What to Do?
The following suggestions are made with the assumption that you owe taxes to the IRS and are aware of the amount you need to pay. If you aren't sure what you owe, the IRS has online tools to help you determine that amount. Also, be sure to refer to tax return documents when filing your taxes. Remember that any inadvertent mistakes can cost you further in time and/or money.
1. You Have To File, Even If You Can't Pay Right Now
First and foremost, you must file your tax returns on time, even if you can't pay what you owe. Note that the IRS imposes both "failure to file" and "failure to pay" penalties. By filing on time, you can skip the late filing fee of 5%. According to the IRS, your late filing fee will never exceed 25% of your taxes. Meanwhile, failure to pay will result in a 0.5% fee. A 1% fee will apply if taxes aren't paid within 10 days of a "notice of intent to levy."
The takeaway? File your taxes on time, even if you can't pay the full amount.
2. Hold Off Paying (In Extenuating Circumstances)
Usually, the filing and payment deadline is April 15. However, in extraordinary circumstances, such as the current COVID-19 crisis, the deadline may be extended. As of this writing, the payment deadline has been extended to July 15, 2020. In such a scenario, you may decide to hold off paying until the new deadline. If your financial situation improves during that period, you may decide to pay the full amount.
However, if you need more time to file your taxes or you're unable to pay after filing your taxes, consider the subsequent steps.
3. Apply For An Extension of Time to File Your Tax Return
As an individual taxpayer, you can file Form 4868 and request an extension for filing your taxes. This measure can grant you an additional six-months (until October 15) to file your taxes. The request for an extension must be made within the regular tax filing deadline of April 15.
If you're unable to make the full payment after applying for this extension, don't worry. You can opt for an installation agreement.
4. Set Up An Installment Agreement
You have the option to ask for an Installment Agreement Request by filing Form 9465. This allows you to set up installment payments for your taxes. The form can be completed online as well, thus reducing your expenses for setting up the payment plan.
You have to satisfy the following conditions to be eligible for this option:
- Owe $10,000 (or less) in taxes, or;
- You can prove that you cannot pay the owed taxes at the current time, or;
- You can pay back the taxes owed within 3 years.
- You can show that you have not filed an Installment Agreement with the IRS in the previous five years.
If you owe more than $50,000, you must file Form 9465 on paper. All agreements are subject to usual tax laws. Required payments can be made by any of the following options:
- Direct debit from your bank account
- Money order
- Credit or debit card
- The Electronic Federal Tax Payment System
5. Use Alternate Methods Like Paying With Credit Cards
In particular cases, you may find that paying off your taxes with a credit card is a favorable solution. You can pay with MasterCard, Visa, American Express or Discover. A pertinent point to consider while paying via credit card is the interest and fees charged by your credit card company. If your credit card has a high-interest rate, the Installment Agreement may be a better option for you.
The advantage of paying with an alternate method like a credit card is that it shifts your debt liability from the IRS to the credit card company. But, this method of payment only benefits you if your expenses for paying by credit card is lower than that of paying to the IRS.
6. Try a Short-Term Payment Solution
Let's assume that you can't pay your taxes on time because of a temporary financial crisis. If that's the case, you should still file by the due date and pay whatever amount you can. The IRS will then send you a bill for the balance owed. That in itself can take about 30 days. If you can manage to amass the balance by that time, this may be a convenient route for you.
The only thing you have to factor in is that you'll be charged a late payment fee on the balance amount.
7. Apply For a Temporary Delay of the Collection Process
In an extreme situation where paying your taxes will lead you to forego bare necessities like housing and food, you can request a temporary delay of the collection process. If you're self-employed, this may be an option for you. This request can be made by calling the IRS at 1-800-829-1040.
You must remember that the IRS can file a tax lien due to a temporary delay in collection. This can potentially impact your credit score negatively. Also, your debt may increase because penalties and fees will be assessed until you pay the full amount (even if you are successful in your application for a temporary delay of the collection process).
8. Arrange For An Offer In Compromise
This particular negotiation tool — Offer In Compromise (OIC) — allows you to repay less than you owe in taxes. However, you must meet stringent criteria to be eligible for this one. You can check your eligibility through the IRS-approved OIC Pre-Qualifier tool.
Note that you'll have to pay an application fee of $186 and offer a considerably large up-front payment for an OIC. This payment amount is usually equal to your net worth (minus your outstanding debts). Hence, an OIC is considered to be an extreme last resort as it can be quite financially draining.
The Bottom Line on Paying Your Taxes
An inability to pay your taxes on time due to unforeseen personal circumstances or global pandemics is understandable. When faced with such a situation, try to remain calm, difficult as that may be. Instead, look at your options objectively. At the end of the day, be as proactive as possible. Do what you can to meet your obligations. If the IRS has proof that you've taken steps like the above, you'd be in a much stronger position.
We offer the necessary advice and tools to help you understand and address common financial issues. For more on how to navigate tax time during the COVID-19 crisis, get in touch with us today.