Bamboozled April 11, 2019: You owe money to the IRS, but you can’t pay your tax bill. Here are your options.

If you can't afford to pay your taxes by the filing deadline, there are options for you. (

If you can’t afford to pay your taxes by the filing deadline, there are options for you. (

Lots of taxpayers were in for a surprise this year after the new tax plan kicked in.

Because most W-2 employees got more in their paychecks each week, they didn’t get the tax refunds they were expecting. And worse, many people underpaid during the year and ended up owing more than they expected.

If you don’t have the cash to pay what you owe, you could be in trouble.

Hefty penalties and interest charges could be headed your way.

The IRS will generally send you a bill if you don’t pay your taxes when they’re due. Then it will send a second notice. If you ignore that, the IRS will start a formal collections process.

That can lead to court judgments against you (hurting your credit score and your ability to get a loan or a job). Then, you could find your wages garnished and a lien on your home. And, the IRS will recapture any future tax refunds you’re due.

Don’t let it go that far. If you can’t send a check to the IRS, here’s what you need to know.

Penalties and interest

It can get very costly.

For a “failure to file,” you’ll face a penalty at a rate of 5 percent per month. It maxes out at 25 percent.

Then there’s the “failure to pay” penalty. It accrues at the rate of .5 percent per month, and also maxes out at 25 percent.

If you have both a “failure to file” and a “failure to pay,” there’s a half a percentage point break: The combined penalty would be 5 percent per month, with a max of 25 percent for the first five months. After that, you’ll be charged another .5 percent per month for 45 more months.

In the end, the total of the combined penalties can reach 47.5 percent.

Then there’s the interest, which is computed at 3 percent above the fluctuating federal short-term interest rate.


File, even if you can’t pay

The IRS knows what money you’ve earned even if you don’t file your tax return. That’s because employers, investment companies and others send tax forms to the IRS – W-2, 1099-Misc, 1099-Int, 1099-Div and 1099-B forms.

In short, if you owe money, the IRS will know.

So even if you can’t pay, you want to file your return on time.

You don’t want to be accused of trying to evade paying your taxes.

You could even pay part of the tax bill – whatever you can afford – so you won’t be subject to penalties and interest on the entire amount. And while we don’t recommend using credit cards to pay a tax bill, it could make sense so you can avoid the penalties and interest.

Other pay delay tactics?

Even if you get an extension on your tax return, that doesn’t stop the penalty and interest clock from ticking.

If you get an extension and pay at least 90 percent of the taxes owed by the filing deadline, you may not face a “failure to pay” penalty if you pay the balance by your extended due date.

Then there’s “undue hardship.”

To qualify, you’d have to prove the hardship. You’d use Form 1127, and you’d have to share statements of assets and liabilities and other documents to show why you can’t pay.

You might qualify for an installment payment option. For this, you’d complete Form 9465 or you can apply for a payment agreement online.

But this comes at a cost. There’s a $120 fee deducted from your first payment after your request is approved. If you pay through direct debits, the fee is reduced to $52. Plus, interest continues to be charged for the installment plan.

If you choose an installment agreement, the IRS can change the agreement if you miss an installment or fail to pay another tax liability.

Then there’s the Full Payment Agreement (FPA), which would give you up to 120 days to pay what you owe in full. There’s no fee for this option, but interest and any applicable penalties continue to accrue until your bill is paid in full.

Offers in Compromise?

You hear the ads on the radio. “You owe taxes? We can get the IRS to accept less than what you owe.”

What they’re hawking is an “Offer in Compromise,” a deal that’s not so easy to make.

It’s basically an agreement under which the IRS agrees to take a smaller payment than what’s owed, the rest be damned.

The IRS isn’t quick to write off taxes owed, so you shouldn’t count on this.

Consider working with a tax expert with experience in such matters, such as a certified public accountant or a tax attorney.

The bottom line

The biggest takeaways here?

File your returns, even if you owe money.

Talk to the IRS about payment options. If you ignore the IRS, believe us, the agency won’t ignore you.

Indeed, tax problems won’t go away on their own. If you don’t feel comfortable talking directly to the IRS, consider hiring a pro. Yes, it will cost you more money, but you will know your interests are represented.

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