What If You Can't Pay Your Taxes?

With the pandemic and so many people losing their job, it feels weird to be talking about having a tax problem. Still, one of my readers has a real issue she needs to tackle this year. You see, she has a massive tax bill coming up. Well, technically her ex has a massive tax bill, but because of her recent divorce, they are pretty much combining their tax bills and splitting it down the middle.

While they can technically handle the taxes, it's not pretty, and neither of them wants to have to deplete their savings to make the payment. So they are looking into other options.

You might be in a similar situation or one that's even worse. After all, even those unemployment checks, along with any of the special unemployment compensation authorized under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, are taxed by Uncle Sam. In fact, since not everybody will opt for tax withholding on their checks, those in unemployment could be in for an even bigger surprise than those who had jobs all along.

Whatever the reason as to why you can't pay your taxes, the good news is that there are options for you. Here's what you need to know if you aren't ready for your tax bill:

Don't Ignore the Problem

It's tempting to avoid filing your tax return when you are in this situation. However, this is one of the worst things you can do. There are penalties when you don't pay your taxes, and penalties when you don't file your return. Ignoring the problem only makes it worse as the penalties and interest pile up.

Instead, make sure you understand your options and move forward in a way that allows you to maintain your financial situation.

Ask for Forgiveness

Contrary to popular belief, people at the IRS are really helpful to those who need help. If what you owe includes a penalty, then call them and see if there are any legal ways you can get some of that penalty waived. This is especially true if you are a small business. I once had an $8,000+ penalty assessed on my taxes because the deadline on when payroll taxes were due for my business changed and I was late with the payment. You see, I just started with electronic payments then and I mixed up the transfer dates when I set things up. There are stiff penalties for being late with payroll tax payments, and they assessed that amount on me for transferring the funds late. After I freaked out and calmed myself, I gave them a call and the people at the IRS were able to waive the penalty because it was the first offense. $8,000, waived!

Sometimes, a tax assessment could be made in error too. I was closing out a defined benefit plan one time and due to how long paperwork is getting processed, I was given notice that I didn’t file an annual form for my plan even though I sent in the paperwork that it was closed months earlier.

There were stiff penalties this time around too. I called the IRS, and they were again very helpful and fixed the issue for me right then and there over the phone.

The moral of these stories is to not be afraid to call the IRS and explain your situation if you owe a bunch of taxes. You never know what they can do for you unless you ask.

IRS Installment Plan

Even if they can’t reduce any of the taxes you owe, one of your best options when you owe taxes is to turn to the IRS installment plan. My reader’s ex-husband is actually using this option to help pay their joint tax bill. As long as you owe less than $50,000 in combined taxes, penalties, and interests, you might even be able to apply directly online. The amount increases to $100,000 if all you are looking for is a short term payment plan, defined as 120 days or less. How this works is that you let the IRS know how much you can pay each month, and as long as you can pay off your bill within six years, there is a good chance you will be approved.

There are fees associated with this plan, but they are usually smaller than what you would see if you get a bank loan to pay your taxes and certainly smaller than what you would see if you put your taxes on a credit card.

In fact, applying online may end up being cheaper for you. Other ways to save on the setup fee include using a short term payment plan instead of a long term one and using direct debit. Low-income folks, defined as those with adjusted gross income at or below 250% of the applicable federal poverty level, may even get their setup fee waived.

It's true that you can borrow to pay your taxes, but this can only compound your problem. Making regular payments to the IRS can help you avoid high-interest debt, while still allowing you to make manageable payments. As long as you don't put it off too long, and as long as you file your return as required by law, the IRS is usually reasonably accommodating when you act in good faith.

Get Professional Help

While it's possible for you to make these arrangements on your own, it can be a good idea to get professional help. My reader’s taxes were complicated by the fact that they divorced last year, and they had a business together that had to be dissolved. Plus my reader had to register a new business all in the same tax year.

Rather than take the time to sort out the snarl on their own, they ended up hiring an accountant to help them out. He coached them through the entire process, helped rectify mistakes made by a former accountant, and helped them understand and apply for the IRS installment program.

Paying for a professional to do things you can do yourself can seem like a big waste of money, but they may know of some tips that can help you end up paying less because they are handling these cases all the time and know the ins and outs of the process. If anything, they can do all the tedious work for you, freeing your time and your mind for more enjoyable activities.

Even though it cost them some money, my reader highly recommended this route since she said her time and peace of mind were worth the financial cost. it really sounded like she was glad they got the help they needed.

Having a huge tax bill you can’t pay can be frightening because of the power Uncle Sam has in collecting what he’s owed. However, it’s an issue that can be solved as long as you don’t hide from them and face the issue head-on.

Don’t be afraid to reach out to them, and consider seeking professional help. You can put it all behind you sooner if you are proactive in dealing with it.

Good luck!