Hans Kasper, MS-CPA, PS

I Can't Pay My Taxes - What Can I Do?
 

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If you owe taxes and can not pay, then you are to do the following:

  • File the return before the due date and make whatever payment you can with the return.  If you canít pay anything, then just file the return on time with no payment in order to avoid significant penalties.  See penalties below.

  • To make installment payments, complete Form 9465 and attach it to the face of the return before filing it.

  • Mail the return using certified mail with a green return receipt card.  This will provide you with the assurance that the return has been received.  Should the IRS lose the return and you have the green card which is your proof of delivery, then you will be able to avoid the failure to file penalty.  See penalties below.

  • The IRS will send you a monthly bill for the amount of your installment agreement unless they feel it is too low, then they will send you a whole bunch of forms to fill out and return to them.  You must pay the installment payment on time for the full amount or send them a letter telling them why you are paying late or short; otherwise, the full amount of the bill will become due immediately.

If you do not pay your taxes and do not qualify for an offer in compromise, then your assets will be subject to an IRS lien.  

What does this mean you ask?  They can place a lien on your home--take your equity when you sell it, ruin your credit rating, take money right out of your bank accounts--even your kids or parents accounts if your SS# is on it, take money out of your 401k or 403b accounts and in some states your IRA accounts, and take money right out of your payroll check.

If you do not want to deal with installment agreements, offers in compromise, and tax liens, then borrow the money from a relative or obtain a home equity loan to pay the past due taxes.  Emotionally, It is far better to borrow the money than it is to deal with the IRS collections division every month for the next five to ten years.

FAILURE TO FILE PENALTY

If you owe taxes and file the return after the due date, then you will be assessed the failure to file penalty even though you file the return at a later date.  The penalty is 5% per month (read again 5% per month, yes that is correct, a 60% interest rate per year) to a maximum of 25% of the tax due.  The only way to avoid this penalty is to file your return on or before the due date including extensions.  If you file extensions and file your return after the extensions have elapsed, then the penalty will be assessed from April 15th.

FAILURE TO PAY PENALTY

If you owe taxes and file your return on time before April 15th without payment, then you will be assessed the failure to pay penalty even though you may have filed an extension and pay within the extension filing period.  The penalty is 1/2% per month to a maximum of 22.5% of the tax due.  The only way to avoid this penalty is to pay all of your taxes before April 15th.

 FAILURE TO ESTIMATE PENALTY

If you do not make your quarterly estimated payments (for those who have not paid in the correct amount of estimated taxes) in a timely manner during the year for the correct amounts, then a penalty will be assessed at an annual rate of 8%.  Therefore, know what your payments are and make them timely.

INTEREST

Whenever taxes are not paid by April 15th, then interest will be charged at an ever changing rate (about 1% per month).

I hope, after reading this, you will understand that the IRS wants you to pay on time and file on time.

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This page was last updated on 05/13/2010

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