- Find out what to do if you can’t pay your taxes.
- Are family loans a good idea?
- Learn about the pros and cons of home equity loans and HELOCs.
- Is paying with a credit card worth the increased interest rates?
- Learn about short-term payment plans offered by the IRS.
- Find information about IRS installment agreements.
- Learn why tapping your retirement funds is a last resort.
- Find out if filing an extension affects your payment timeline.
- Learn about the IRS’s enforced collection actions.
- Learn about the IRS’s Offer-in-Compromise or “Fresh Start” program.
Although most (74% in 2020) American taxpayers receive a refund each year when they file their income tax returns, there are those who for one reason or another end up owing. Of those who owe Uncle Sam, many cannot pay what they owe by the return due date (usually in April).
Generally, tax due occurs when a wage earner has under-withheld on his or her payroll or a self-employed individual failed to make adequate estimated tax payments during the year. This can be a huge problem for those who are unable to pay their liability.
Generally, for your own best interests, you should make other arrangements to obtain the funds for paying your 2021 taxes. Dealing with the government’s penalties and interest for payments made after April 18, 2022, definitely has its downsides. Below, Fiducial has a few options to consider.
Need help paying your taxes? Fiducial has options below!
Obtaining a loan from a relative or friend may be the best bet because this type of loan is generally the least costly in terms of interest.
Home Equity Loans and HELOCs
Use the equity in your home—that is, the difference between your home’s value and your mortgage balance—as collateral. As the loans are secured against the equity value of your home, home equity loans offer extremely competitive interest rates—usually close to those of first mortgages. Compared with unsecured borrowing sources, such as credit cards, you’ll be paying less in financing fees for the same loan amount. Unfortunately, obtaining these loans takes time. So, if you anticipate that you’ll need funds from such a loan to pay your taxes that are due in April, you should get the application process started right away.
Another option is to pay by credit card with one of the service providers that work with the IRS. However, since the IRS will not pay a credit card discount fee (the fee charged by the credit card company), you will have to pay the fees due. You will also pay the higher credit card interest rates.
Short-Term Payment Plan
If you can fully pay the tax owed within 180 days and owe less than $100,000 including tax, penalties, and interest, you can apply for a short-term payment plan online at the IRS website. You won’t be charged a set-up fee. However, you will still have to pay penalties and interest until the balance owed is fully paid. Setup fees will be charged if you apply for a payment plan by phone, mail, or in-person instead of online.
IRS Installment Agreement
If you owe the IRS $50,000 or less, you may qualify for a streamlined installment agreement. With this, you can make monthly payments for up to six years. You will still be subject to the late payment penalty, but it will be reduced by half. Interest will also be charged at the current rate. There is a user fee to set up the payment plan. However, the IRS generally waives the fee for low-income taxpayers who agree to make electronic debit payments.
In making the agreement, a taxpayer agrees to keep all future years’ tax obligations current. If the taxpayer does not make payments on time or has an outstanding past due amount in a future year, they will be in default of their agreement. The IRS has the option of taking enforcement actions to collect the entire amount owed. Taxpayers seeking installment agreements exceeding $50,000 will need to validate their financial condition and need to obtain an installment agreement by providing the IRS with a Collection Information Statement (financial statements). Taxpayers may also pay down their balance due to $50,000 or less to take advantage of the streamlined option.
Tap a Retirement Account
This is possibly the worst option for obtaining funds to pay your taxes. This option jeopardizes your retirement lifestyle and distributions are generally taxable at your highest bracket. This just adds more taxes to your existing problem. In addition, if you are under age 59½, the withdrawal is also subject to a 10% early withdrawal penalty. This penalty compounds the problem even further.
Filing Extensions for Taxes
Don’t mistake the ability to apply for an extension of time to file your tax return as also being an extension to pay any tax liability. It is not and does not grant you an extension of time to pay. The penalties and interest on the amount due will continue to apply as of the original due date of the return.
Enforced Collections of Taxes Due
If the taxes cannot be paid timely, and the IRS is not notified why the taxes cannot be paid, the law requires that enforcement action be taken, which could include the following:
- Issuing a Notice of Levy on salary and other income, bank accounts or property (IRS can legally seize property to satisfy the tax debt)
- Assessing a Trust Fund Recovery Penalty for certain unpaid employment taxes.
- Issuing a Summons to the taxpayer or third parties to secure information to prepare unfiled tax returns or determine the taxpayer’s ability to pay.
Note: To collect delinquent tax debts, certain federal payments (vendor, OPM, SSA, federal salary, and federal employee travel) disbursed by the Department of the Treasury, Bureau of Fiscal Service (BFS)) may be subject to a levy through the Federal Payment Levy Program(FPLP).
Fresh Start Initiative
The IRS also has what is called the “Fresh Start” initiative to offer more flexible terms in its existing Offer-in-Compromise program which, under certain circumstances allows taxpayers to settle their tax debt for reduced amounts. This enables financially distressed taxpayers to clear up their tax problems faster than in the past. While resolving tax problems might previously have taken four or five years, taxpayers may now be able to resolve their problems in as little as two years.
If you have questions about the payment options or an offer-in-compromise, please call this office for assistance. Don’t just ignore your tax liability because that is the worst thing you can do.