Since 1995 when Tax Day was moved from March 15th to April 15th, the welcoming of the spring season doubles as a reminder to fulfill your annual tax-filing duties. If you’re like most American taxpayers, you leave the heavy-lifting duties to automated e-file systems or tax professionals to square away your tax return, but that doesn’t always mean that everything is out of your hands. In the event that you owe the IRS any amount of money, you’ll need to seriously assess how your tax liability changes.

If you’re scratching your head wondering “can I file taxes if I owe the IRS?” or “what do I do if I can’t pay the IRS?”, we’re here to help. Using this guide, we’ll walk you through everything you need to know about filing taxes when you owe money, the penalties to expect in certain circumstances, and smart ways to handle repayment on back taxes.

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Filing Taxes If You Owe the IRS

Tax season can be a stressful time. This is especially true if you owe back taxes or have recently found out you owe a tax balance to the IRS. Intimidating as it may seem, there are a number of viable avenues available to you to properly manage and repay your debts.

For the 2020 year, Tax Day was officially pushed from April 15th to July 15th in light of the COVID-19 pandemic. This gives taxpayers an extra three months of leeway to file and assess their tax liability and find workable methods to offset any IRS bills owed.

No two persons’ tax situation will be exactly alike—should you find yourself in a situation where you’re wondering “can I file taxes if I owe the IRS?” or “what can I do if I can’t pay my IRS bill?”, you may need some third-party assistance. We’re here to provide answers to those questions and give you the guidance and reassurance you need to stay on Uncle Sam’s good side.

What Happens If You Owe the IRS and Don’t File?

One of the most common mistakes taxpayers who owe the IRS make is forgoing the filing process altogether. Owing the IRS does not relinquish you from your regular tax filing duties, in fact, doing so will only worsen your situation.

When you fail to file your annual tax return, the IRS automatically slaps on a 5% penalty for each month past tax day that you neglect to file. The maximum failure to file penalty tops out at 25%, but it’s worth noting that while the percentage may be cut, you’ll still be responsible for paying any interest accrued on the bill up until it is paid in full.

If you foresee that you will not be able to file your taxes by Tax Day, it’s imperative that you request an extension as soon as possible. When filed, signed, and approved, IRS Form 4868 grants an extra six months for you to turn in your tax return. It’s important to note that getting approved for an extension does not grant you more time to  pay your taxes, it simply provides more time for you to file your return.

Don’t forget that state and local taxes are also subject to additional failure-to-file penalties, which are entirely determined by state law. California, for example, imposes a 10% fee

What Happens If You Owe the IRS and Don’t Pay?

In the event that you owe the IRS an outstanding tax balance and do not pay it off, you will become subject to a number of serious potential consequences. You’ll first receive a stern letter from the IRS which will quickly escalate into increasingly grievous penalties if you refuse to make a payment or configure a payment plan.

Between the due date and the date your bill is finally paid, the sum of your unpaid taxes will accrue both penalties and interest. Interest will begin accruing on the date stated on your IRS notice and will compound daily until your tax balance is paid in full. The current interest rate sits at 5% while the failure to pay penalty is 0.5% per month.

Prolonged evasion of paying your tax bill could result in the IRS taking money out of future tax refunds if you’re owed any. Continued negligence could mount to the IRS placing a federal tax lien against your property. Federal liens are designed to protect the government’s interests at all costs which means the IRS is authorized to make a legal claim on your real estate and other assets. If you’re too slow to take care of a federal tax lien, a tax levy could be the next step.

Tax levies authorize the IRS to seize your assets to fully recoup your outstanding tax debt. Tax levies take many different forms, including:

  • Property seizure: Everything from your house to your car can be seized by the IRS and sold to cover your remaining tax balance.
  • Bank levies: The IRS can require your bank to prohibit any withdrawals from your account for 21 days. The IRS also can also withdraw funds from your account and require your financial institute to comply.
  • Wage garnishment: The IRS can require your employer to hold back a portion of your paycheck and send it directly to the IRS until your debts are completely paid.

Failure to pay taxes could even result in jail time, though it’s highly unlikely unless you owe hundreds of thousands of tax dollars.

What Happens If You Owe the IRS and Can’t Pay?

Despite their reputation as a federal institution of fear and debt collection, the IRS would much rather work with you to ensure you’re meeting your legal obligations than punish you. If you’re in a situation where you’re unable to pay your tax debt, there’s no need to panic.

Understanding your options will help you better determine the best course of action when you owe the IRS but can’t afford to foot the bill. Here are a few common options for taxpayers with an outstanding balance they’re struggling to pay.

Option #1:  Apply for a Hardship Extension

Falling on hard times is a simple part of life, and the IRS can accommodate your financial troubles through a hardship extension. Available to taxpayers who are facing undue hardship, this extension allows up to 6 additional months to the standard repayment period. For an extension based on hardship, eligibility is contingent upon proof that demonstrates that paying your tax balance in full would cause extreme financial hardship.

In the words of the IRS: “The term ‘undue hardship’ means more than an inconvenience. You must show you will have a substantial financial loss (such as selling property at a sacrifice price) if you pay your tax on the date it is due.”

Action required: As soon as you become aware of an outstanding tax liability that you cannot pay, you should file IRS Form 1127. Within this application form, you will be expected to provide a detailed account of your reason for applying and any supporting documentation that can certify your claim.

Supporting documentation includes:

  • A statement of assets and liabilities at the end of last month. (This statement should detail book and market values of assets and whether securities are listed or unlisted.)
  • An itemized list of income and expenses for each of the 3 months prior to the tax bill due date.

 Fees or cost: Applying for an Extension of Time for Payment of Tax Due to Undue Hardship is free. Once approved, you will face no penalties, but interest will accrue in the months leading up to full payment.

Option #2: Set Up a Payment Plan

To make it easier for taxpayers to afford and repay their tax debts, the IRS offers payment plans. By dividing your tax bill into monthly installations, you can avoid the jarring financial impact of paying the full lump sum at once. IRS payment plans are made directly with the federal agency. There are two types of payment plans you may be eligible for: short-term and long-term.

Short-term payment plans (120 days or less) allow taxpayers up to four months to repay their debts in four equal payments. Short-term payment plans are only available to those who owe a maximum of $100,000 in combined taxes, penalties, and interest. Long-term payment plans, also known as installment agreements, can allow up to 72 months of repayment time. These plans are available to those who owe $50,000 or less in combined taxes, penalties, and interest.

The type of payment plan agreement you may qualify for depends on your particular situation. Factors like how much you owe and how soon you can pay the balance are typically the most important determining elements.

After receiving approval from the IRS, it’s absolutely crucial that you stay on track and pay your monthly bill on time. The IRS has the authority to void an agreement if you neglect to comply with the terms and conditions of your contract.

Action required: In order to apply for either form of IRS payment plan, you’ll need to fill out Form 9465.

For installment agreements over $50,000, you may need to submit supporting financial documentation, though this is atypical.

Fees or cost: Short-term payment plans are free to apply for and free to set up, however, interest will accrue on your unpaid balance at a rate of 0.25% per month until your full balance is totally recouped. Additional fees apply if you complete your monthly plans via credit or debit card payment.

For non-direct debit long-term installment agreements, the application fee is $149. This amount is reduced to a reimbursable $43 application fee for those who qualify as low-income. For auto-debit long-term installment agreements, the application fee is reduced to $31. This amount is fully reimbursable for those low-income applicants. To determine if you qualify or to apply for a low-income application fee, submit Form 13844.

Option #3: Request a temporary collection delay

Similarly to applying for an extension due to hardship, if paying off your tax bill would prevent you from affording basic necessities such as food and housing, you may be eligible for a temporary collection delay. This request would provide some extra time and leeway as your financial situation improves.

Should the IRS support your claim and approve your request, they can mark your account as not collectible and place a temporary delay on collection. It’s important to distinguish that a not collectible status doesn’t erase your outstanding tax debt, it simply means the IRS has allowed time for your circumstances to heal before relinquishing the hold.

Do note that a temporary delay does not suspend your debts from collecting interest and penalties. Your tax bill will increase for as long as it goes unpaid. A temporary collection delay also authorizes the IRS to file a tax lien against you—generally speaking, this should be a last resort option.

 Action required: To request a temporary collection delay, contact the IRS by phone at 1-800-829-1040. You may be asked to submit a Collection Information Statement that takes form as Form 433-F, Form 433-A or Form 433-B. You may also be asked to provide proof of financial status to make your case to the federal agency.

 Fees or cost: There’s no cost to apply for a temporary collection delay.

How to Get Your Tax Debt Resolved

Option #1: Contact a Tax Professional

Dealing with your tax responsibilities can be overwhelming, stressful, and confusing. There’s plenty of paperwork to be filed and documents to be read to ensure you’re making the best legal decision for you and your finances. Rather than subjecting yourself to the anxiety and chaos of your complicated tax situation, turn to a tax professional.

 Tax professionals understand tax laws and IRS regulations and their expertisecan streamline your filing and payment processes. Working with Community Tax means leaving your worries about late penalties and filing mistakes in the past and looking forward to a debt-free future. We offer an array of tax preparation and tax resolution services, so you can find a professional tax program that suits your exact needs. From help with back taxes to assistance in determining if you owe the IRS, we’re here to guide you toward the light at the end of the tax tunnel.

Option #2: Consider an Offer in Compromise

An Offer in Compromise functions as a way for you to settle your tax debt for less than the full amount you owe. This option is great for those who aren’t able to pay their full liability if doing so causes financial hardship. In essence, an Offer in Compromise can help manage or eliminate an unaffordable tax burden.

 The IRS’ Offer in Compromise Pre-Qualifier tool is a quick and easy 6-step questionnaire that can confirm or deny your eligibility in minutes. To fully assess that paying your tax bill in full would cause financial hardship, the IRS accounts for a few key considerations; ability to pay, income, expenses, and asset equity. Those eligible will be expected to submit an application using Form 433-A and pay a non-refundable $186 application fee.

Option #3: Sign Up for the IRS Fresh Start Program

Initiated in 2008, the IRS Fresh Start Program was designed to allow taxpayers to manage their tax debts over the course of a six-year repayment period. Available to those who owe up to $50,000 in taxes, the Fresh Start Program effectively simplifies the process of recouping massive tax debts. Each month, qualified taxpayers are expected to make payments based on their current income and the value of their liquid assets. By the conclusion of the six-year term, the outstanding tax debts should be paid off in full.

Can I File Taxes if I Owe the IRS: Wrapping Up

Yes, if you owe the IRS you can still file taxes, and in the majority of cases, you must. Even if you are burdened with hefty sums of outstanding tax balance, there are a number of open avenues available to you that are designed to help ease the financial load.

When in doubt, give Community Tax a shout! Our tax professionals are always here to help with any of your tax questions or problems.