The One Thing You Should Never Do if You Can’t Afford to Pay Your Taxes

published Mar 9, 2021
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If you’ve got a tax bill you can’t afford, you aren’t alone. According to IRS data from 2019, Americans owed over $125 billion in unpaid taxes, interest, and penalties between 2018 and 2019. Tax debt happens. Whether you skipped payments or didn’t withhold enough, your situation may be better than you think. 

“Don’t stress out because you have options,” says Nayo Carter-Gray, EA, founder of 1st Step Accounting in Baltimore, Maryland. But you need to file your tax return first. Once you file, there are options to get back on track.

But whatever you do, don’t skip the tax deadline.

Although it may be tempting to skip filing your return, experts say this is a big mistake. “If you think you owe money and will have a large bill, file your tax return on time,” Carter-Gray recommends. “There is a penalty you can avoid if you file by the deadline.” 

The IRS charges a failure-to-file penalty for returns filed after the tax deadline or extension. The fee is five percent of your unpaid taxes per month, capped at 25 percent until they receive your return. (By comparison, the failure-to-pay penalty is much smaller at 0.5 percent per month.)

There is one exception, though. The IRS may waive your late penalty through its First Time Penalty Abatement if you meet the following rules:

  1. You have three years of on-time filing and payments. 
  2. You have filed all your required tax returns. 
  3. You have paid taxes due or set up a payment plan.

If you’re ready to kick off your debt payoff plan, here are four IRS-approved ways to get started.

Option #1: Payment Plans 

Tax debt can be alarming, especially when a letter from Uncle Sam shows up in the mail. Luckily, the IRS offers two payment plans to make it more affordable:   

  • Short-Term Payment Plan: If you owe less than $100,000 and can cover the payment within 120 days, you can sign up for a short-term payment plan. There is no setup fee.
  • Long-Term Payment Plan: The long-term payment plan, or installment agreement, may be an option if you owe $50,000 or less. The setup fees are $31 for automatic payments or $149 without direct debit, with an optional fee waiver for folks who make less than 250 percent of the federal poverty level.  

“Generally, the IRS wants you to pay off the debt within five years,” says Carter-Gray. But beware, you will keep racking up penalties and interest until your balance is $0.

Option #2: Offer to Pay Less

If you’ve suffered a job loss, costly medical bills, or another emergency, the IRS understands and may work with you. The negotiation, called an offer in compromise, may slash your tax bill, but not everyone will qualify.

They are more likely to accept your offer in the following cases:

  1. There’s a dispute over how much you owe.
  2. Your income and assets are too low to pay off the debt.
  3. The payoff would create “economic hardship” or would be “unfair and inequitable.”

Curious if you might be eligible? Start by plugging your info into the Offer in Compromise Pre-Qualifier. You can learn more about this option, along with how to apply here.

Option #3: Pause Collections

If you’re struggling to cover the basics, it might be possible to get a temporary pause on your payments. While this may offer some breathing room, you won’t stop the clock on penalties and interest. 

To be eligible, the IRS will need proof of financial hardship. “If you’re currently working, have savings, and you own a home, the IRS may not approve your request,” says Carter-Gray. 

Option #4: Pay with a Credit Card

Paying your taxes with a credit card is another choice, but you’ll need to run the numbers. “Compare the interest rates before making a decision,” says Carter-Gray. “If your credit card is cheaper, it could be a better move.”

Don’t ignore the fees, though. Credit card processing fees range from 1.96 percent to 1.99 percent, adding nearly $200 to a $10,000 tax payment, and credit card interest can be high. With average interest rates hovering around 15 percent, your debt could grow faster than you expect. 

Still, it may be worth it if you can’t afford the monthly payments from the IRS. “It may cost more in the long run, but it may be easier to manage,” Carter-Gray says.

Credit: Minette Hand

And don’t be afraid to tap an expert for help.

Taxes can be stressful and you shouldn’t hesitate to ask for help when you need it. Carter-Gray says a tax professional, like an enrolled agent (EA), certified public accountant (CPA), or tax attorney, can talk to the IRS about your debt and try to negotiate for you. 

“Working with a tax professional may reduce some anxiety,” says Carter-Gray. “It’s like having a big brother or big sister to defend you.”  

If you can’t afford a tax professional, you could qualify for free or low-cost advice through the Low Income Taxpayer Clinics (LITC), an IRS advocacy group. Regardless of what you decide, it’s critical to take action. “If you ignore the bills, there will be a problem,” she says.