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By Cynthia Widmayer, Bankrate
If you owe taxes but can’t afford to pay them, you have a few options:
- A monthly installment plan.
- An offer in compromise.
- Partial payments.
You can choose one of these solutions to take care of taxes owed, depending on your financial situation.
Monthly installment agreement
The IRS offers flexible payment agreements to those who can pay the taxes they owe eventually. These are monthly installment plans that will accrue interest like any loan, and typically have a length of 72 months provided the amount including taxes, penalties and interest doesn't exceed $50,000. All you have to do is sign up for a payment agreement or send Form 9465 after you have filed your tax return.
This option only works if you paid all past returns. Also, current taxes will continue to accumulate while you're on the payment plan, and without proper budgeting, you can keep owing money to the IRS year after year.
Offer in compromise
If you just don't have the money to pay the taxes you owe, you can request an offer in compromise. This option enables you to request the IRS to settle your tax debt for less than what you owe, but the IRS will consider your ability to pay, your income, expenses and asset equity to determine if you qualify for this arrangement.
If your tax debt is huge and you have limited assets to pay for it, an offer in compromise might be a good idea. With this option, you pay 20 percent of your debt upfront and the rest in installments. If, however, the IRS thinks that you have the ability to pay your taxes within the next ten years, it may not approve your offer. What's more, it can sue you if your offer is accepted but you fail to follow through your payments.
Partial payments
Regardless of how much you owe the IRS, and whether or not you can pay it, don't neglect to file your return. You can make a partial payment when you file and continue to make small payments each month within your budget. This not only reduces some of your tax burden but also gives the IRS a favorable impression of you. Also, the failure to file on time has a harsher penalty than failing to pay; an interest rate of 4.5 percent a month is charged for not paying on time, compared to the 0.5 percent charged for failing to pay.
By making partial payments the IRS will be more willing to help you figure out a payment plan.
Other options to help you pay your taxes
There are other options available to you to get the funds for your taxes. These options will always vary according to your specific circumstances.
1. Borrow from friends or family
Having trusted friends and/or family members to lend you money can be a solution for paying your outstanding tax bill. Keep in mind, however, that money borrowed by friends and family can complicate your relationship with them if you have trouble repaying them back. What's more, the loan must be repaid, so you're stuck with yet another payment even if you clear your taxes.
2. Request an extension
Generally, you can request a six-month extension to file your taxes. This won't save you money, but rather it will buy you time to arrange for your funds.
3. Pay with your credit card
Paying your tax bills through a third party may be convenient but it may not be the wisest option. You'll end up paying more than you actually owe the IRS after the addition of interest and convenience fees.
Read more: Are you receiving unemployment? Read this before filing your taxes
Getting hit with a tax bill that you can't afford to pay back at once isn't the end of the world. You should still file on time but consider sending a partial payment and then consult a revenue officer about an installment plan. You may even get legal help from a tax consultant if your case is too complicated or you owe too much in taxes.
See more at Bankrate
