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If you're having trouble paying your taxes, know that there are ways to get relief and ease the stress you may be feeling. A tax bill you can't afford now shouldn't be left unpaid—especially since the penalties for doing so can be steep.
The IRS offers structured payment plans and options to reduce the penalties that accrue on outstanding tax bills if you qualify. It can be scary to confront a tax burden, but it's not something that will disappear if you ignore it. Take time to evaluate your situation and start to take action one small step at a time. Here's how to start.
How Does Not Paying Taxes Hurt Your Finances?
Avoiding a tax bill and opting not to pay—or not filing at all when you're required to—won't cause the IRS to forget about what you owe. In fact, ignoring a tax bill can lead to high penalties and accrued interest that greatly increase the amount you'll ultimately have to pay back. For example, if you don't file by the federal deadline (which the IRS extended to May 17 this year) and it turns out you owe tax, the IRS will charge you 5% of the unpaid tax you owe per month for up to five months, to a maximum of 25%. If you file more than 60 days late, you'll pay a minimum late filing fee adjusted annually ($435 for tax returns filed in 2021), or 100% of the unpaid tax as a penalty—whichever is less.
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You'll also pay a penalty if you do file your return but don't pay the taxes you owe by May 17. That penalty is 0.5% of the unpaid balance per month for up to five months, up to a maximum of 25%. The penalty rises to 1% per month if you don't pay within 10 days of receiving a notice that the IRS may levy your property, meaning it may seize your property (including cash savings and retirement accounts) or garnish your income. The IRS may also file a lien against property you own in order to establish their claim against it. When a lien is in place, the IRS can collect part of the proceeds to pay off the tax debt if you sell the property.
A tax lien could also affect the likelihood you'll qualify for credit in the future. Tax liens won't be placed on your credit report, so lenders won't be able to see the lien simply by performing a credit check. The lien itself won't affect your credit scores, either. However, some lenders, particularly mortgage lenders, may perform a public records search during the application process, and the lien will be visible there. That could prevent you from qualifying for a loan.
Then there's interest on unpaid tax: You'll pay the federal short-term interest rate (0.12% as of February 2021) plus 3% from your filing deadline to the date the tax is paid. For the first quarter of 2021, the interest rate for individuals is 3%.
Ways to Get Tax Relief
The most important thing to remember about having trouble paying taxes is that you're not on your own. The IRS has multiple programs in place to help, and many others before you have taken advantage of them. It's worth it to reach out for assistance if you need it. You can discuss your payment options with the IRS by calling 800-829-1040. Here are some examples of what's available:
- Payment extension: You can get up to 120 days to pay in full by agreeing to a "full payment agreement" with the IRS. Penalties and fees will continue to add up. Some taxpayers can get an extension of up to 180 days.
- IRS installment agreement: The IRS offers monthly payment arrangements if you're unable to pay your full bill by the deadline, or within 120 days. You can pay by direct debit, credit card, payroll deduction or a number of other methods, depending on the balance owed. You'll pay a user fee for entering a payment plan, but if your income falls beneath certain thresholds, you may be exempt from the fee. The amount you must pay to set up the plan also depends on whether it's a long-term or short-term payment agreement.
- Offer in compromise: If you'd like to enter an installment agreement but cannot afford to pay your tax bill in full, you can coordinate with the IRS to pay less than you owe—by a certain deadline. This arrangement is called an offer in compromise or partial payment installment agreement. You must be up to date on all filing deadlines to qualify for an offer in compromise; you can check if you meet the requirements online.
- Penalty relief: If it's your first time not being able to meet your tax obligations, you can apply for a first-time penalty abatement, which can eliminate penalties for failing to file or failing to pay on time.
- Temporary collection relief: If you can't currently pay your taxes due to a demonstrable financial hardship, you can arrange with the IRS to temporarily delay collection of the debt. Penalties and interest will continue to accrue.
What to Do if You Can't Get Tax Relief
In nearly all cases, an official method of relief will be available to you. But aside from an IRS payment arrangement, you do have the option to pay taxes with a credit card or a personal loan. These aren't always the wisest options, however, since using a credit card will mean incurring extra fees and increasing your credit utilization. A personal loan will add an installment debt to your bottom line—potentially at a higher interest rate than what you'd pay through the IRS for a payment plan, depending on your credit score.
No matter what, when it becomes clear that you'll be unable to meet your tax obligations, it's important to take action as quickly as possible. You might start by paying whatever you can now to show the IRS that you're committed to paying your bill eventually. Then, get in touch with the IRS to identify options for paying over time or getting a penalty abatement; this can help prevent an unwanted outcome like a tax lien or outsize fees.
If debts and other financial needs are making it impossible to meet your tax obligations, you might also look into credit counseling and financial assistance. A credit counselor can work with you to take care of your debts and free up some space in your budget. And if you're in need of financial help, there are resources out there that can help you take care of bills, pay for food and connect you with government aid programs.
Moving Forward From Tax Troubles
Like any other type of debt, unpaid tax can feel like a weight on your shoulders. That feeling doesn't have to be permanent, however, and there are many structured paths out of it. Make a plan to pay what you can afford, in consultation with the IRS, and you can move forward without tax concerns troubling you.