What can you do if you cannot afford to pay your taxes

By Xin Lu. Last updated 15 April 2009. 7 comments

Today is April 15th, also known as the dreaded Tax Day in America. Due to the recession many people may find that they do not have enough money in the bank to pay what they owe.  Instead of marching in the various "tea parties" happening today, this is what you can do if you find that you do not have enough money to pay Uncle Sam. 

The first thing you should do is to file for an extension with form 4868.  Simply filing this form gives you six months of breathing room and extends the deadline to October 15th.  If you know that you owe a significant amount of taxes you should also pay what you can at this point because you still have to pay penalties and interest  on the amount you owe.

The tax penalty is 0.5% of the amount you owe every month after today if you file your taxes  and cannot pay the full amount.  Additionally, you have to pay  interest with an APR of around 3% on the amount owed.  However, if you do not file at all the penalty would be 5% of the amount you owe every month plus interest. The maximum penalty is 25%.  Basically, the first thing you should do is to mail in your return or extension request even if you cannot pay the entire amount.

This year, the IRS is supposedly offering leniency to those who are facing financial hardship.  However, they will only help if you file a return in time and if you proactively contact them.  The IRS has always had an installment plan for paying your taxes, but you need to file Form 9465 to do this or apply online for an installment plan.  The installment plan is generally available to those with tax bills less than $25,000 and a good history of past tax payment.  There is still a 0.25 percent a month penalty on this plan.

If it is possible for you to borrow money at a rate lower than what the IRS is charging then you should use that to pay off the IRS first.  For example, if you have a credit card with a 0% promotional rate you can pay the taxes with it and pay it over the promotional period.  There is a transaction fee of 2.49% to put your taxes on a credit card, but if you have a 12 months promotional period at 0% then it is cheaper to owe the credit card company over the period of one year.  This is not without risk since credit card companies can change their rates suddenly so you should try to pay it off as soon as possible.

The IRS  really hates it when you ignore them  so it is  urging taxpayers to file their taxes on time and then call 1-800-829-1040 to discuss payment options. If you do not contact the IRS  at all then its agents  do have many aggressive collection tactics and the power to place liens on your property. So the bottom line is that you should send something to the IRS today regardless of your ability to pay.

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Guest's picture

We had a couple years in our past when we owed a few grand unexpectedly and ended up charging it to buy ourselves some time. I'd charge it on my credit card, get the miles, and then if I needed more than a month to pay off I'd take advantage of a 0% balance transfer promotion to move it to another card. I never needed more than a couple months to pay it off, so it didn't make me too nervous.
This year I'm ashamed to say I had to file an extension, and I was confused about what good that was actually doing me. Thanks for explaining that filing that little paper might in fact save me money (I'm hoping we don't owe anything this year so we won't pay any interest or penalties.).

Guest's picture

4 years ago I ended up owing a small fortune in self employment taxes. I did the math and determined it was more cost effective for me to open a new credit card with an introductory offer of 0% and ride the balance on that for 6 months rather than owe the IRS a balance and pay their penalties and interest.

Chances are if you owe money you should check your withholding's and balance them accordingly. If you are self employed like I was plan to save 25% of all income for tax time. It may be overkill, but its better to have more stashed away in preparation then it is to owe some.

Guest's picture

I've worked with the IRS for years, on behalf of taxpayers of all types and size. Folks who do not regularly deal with the IRS or taxes often fail to realize that Congress keeps the IRS on a very short leash --

The IRS only has the ability to do the things which Congress has specifically authorized it to do. It does not enjoy discretion to exceed the bounds of law. For example, there are statutes that allow the IRS to forgiven taxes and penalties owed by some taxpayers in some situations. The applicable statutes delineate the facts that must exist before the IRS can forgive the debt. If one's situation does not meet the facts laid out in the statute, then the IRS is not permitted to forgive the debt. Even if the situation is truly compelling, and one that Congress inadvertantly omitted from the law, the IRS is not permitted to forgive the debt.

This is why it is critical to meet the letter, not just the spirit, of the tax laws. The Treasury will not go bankrupt if you file your taxes in the wee hours of the morning of April 16. Surely that's good enough to meet the spirit of filing on time! But the IRS isn't allowed to treat you as if you had filed one day earlier because, in fact, you didn't file on April 15. Congress hasn't enacted the laws that would permit them to do so. So save yourself the trouble, and meet the letter of the deadlines.

Fred Lee's picture

We all know when our taxes are due, and all it takes is some diligence to get them done. Sure, the tax laws are a mess, but knowing what needs to get done and the consequences of your inactions translates into no excuses come April 15. Not that you needed me to tell you that.

Guest's picture

The IRS offers a payment plan if you can't pay all of your taxes on time. I have known about that for awhile & am kind of surprised that isn't mentioned in this article. If you'd like further information, look under "Installment Agreements" at this link: http://www.irs.gov/newsroom/article/0,,id=206489,00.html?portlet=7

Xin Lu's picture
Xin Lu

Claire7676, you probably did not read the section where I wrote about the installment plan and form 9465.

Guest's picture

IRS may be able to provide some relief, such as a short-term extension of up to six months to pay your bill. Or you may be able to work out a monthly payment plan. The IRS is required to accept what you owe in monthly installments of up to three years if your total tax liability (not counting interest and penalties) is $10,000 or less.