Can’t Pay Your Taxes? Here Are Some Payment Options

• Find out what to do if you can’t pay your tax bill.
• Learn about the automatic extension in federally declared disaster areas.
• Find out why family loans may be the best payment option.
• Learn about home equity loans and HELOCs.
• Should you pay your taxes with a credit card?
• Learn about the IRS’s short-term payment plan.
• Find information regarding IRS Installment Agreements.
• Discover why using retirement funds is the least favorable way to pay your tax bill.
• Learn about filing extensions.
• Find information about enforced collections.
• Learn about offers-in-compromise.

About 3 out of 4 American taxpayers receive a refund each year when they file their income tax returns. However, there are those who for one reason or another end up owing. Of those who owe Uncle Sam, many can’t pay their taxes 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.

It is generally in your best interest to make other arrangements to obtain the funds for paying your 2022 taxes rather than be subjected to the government’s penalties and interest for payments made after April 18, 2023.

NOTE:

If you live in a federally declared disaster area the due date may have been automatically extended. The extension will generally apply if you reside in the disaster area. You need not be directly affected by the disaster to qualify. Check the IRS website at Tax Disaster Relief Situations for areas that have disaster filing relief extensions and limitations, if any. For example, taxpayers in most of California and parts of Alabama and Georgia now have until Oct. 16, 2023, to file various federal individual and business tax returns and make tax payments. Thus if you owe federal income tax, you have until Oct. 16, 2023, to pay your tax liability. Call your Fiducial representative to confirm you qualify and for information related to state disaster relief due date postponements.

Can’t pay your taxes? Consider the options below.

Family Loan

Obtaining a loan from a relative or friend may be the best bet. 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 available currently. Compared with unsecured borrowing sources, such as credit cards, you’ll pay 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.

Credit Card

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 and 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 but will still have to pay penalties and interest until the balance owed is fully paid. Set-up 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 agreement, you can make monthly payments for up to six years. You will still be subject to the late payment penalty, but it may be reduced. 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 will have 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 for 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. Why? Because you are jeopardizing your retirement lifestyle and the distributions are generally taxable at your highest bracket. This only 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 that compounds the problem even further.

Filing Extensions

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

If you cannot pay your taxes timely, and you do not notify the IRS of why you cannot pay your taxes, the law requires the instigation of enforcement actions, 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 for those who can’t pay their taxes

The IRS also has what it calls the “Fresh Start” initiative to offer more flexible terms in its existing Offer-in-Compromise program. Under certain circumstances, this 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.

Have questions about payment options or an offer-in-compromise? Don’t just ignore your tax liability because that is the worst thing you can do. Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations to discuss your situation.

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