When You Can’t Pay Your Income Tax Return

What happens if you fail to file a tax return this year?

Nothing, at first. Even though it’s a misdemeanor, you won’t get arrested. We don’t have a debtor’s prison here and at least for now, there are no tax police looking to arrest non-filers. But, eventually, bad things will happen, and get worse over time. If you have a tax bill payment due date approaching and you find yourself owning a balance you can’t pay, file anyway. At least this way you avoid the hefty late-filing penalty but not the smaller late payment penalty.

Your federal income tax return is due on April 15 but you can get an automatic extension to delay that until October 15 by filing IRS 4868 (but this does not extend the April 15 due date for paying all taxes you owe).

Communicate with the IRS

There’s a tendency to bury your head in the sand with tax problems. If you’re unable to pay, what can you do? Actually, it turns out you can do quite a bit to mitigate the penalties and fees you’ll pay if you simply communicate with the IRS.

Send in as much as you can along with a completed Form 9465, Installment Agreement Request. This is a one-page form that can be easily completed and submitted online at the IRS website or can be obtained by calling 800-829-FORM. If you’re sending in a hard copy of the form, make sure you include a copy of your tax return.

On Form 9465, let the IRS know how much you can pay monthly on the balance.  It doesn’t matter what the amount is, the IRS will reply within 30 days to let you know if a plan has been approved, or if they need more financial information from you before making the decision. If you submit this form during tax season, it will take longer for the IRS to reply and you may even receive a bill. Don’t panic and worry that the IRS lost your installment request form. Chances are the IRS simply haven’t had time to process it yet. Respond by sending in another copy of your completed Form 9465.

If the tax balance owed is less than $25,000, your request should be granted although the IRS may increase the monthly payment amount. If the IRS rejects your plan and you cannot come to an agreement, you’ll have to provide financial data and negotiate in person.

But all this is far better than ignoring the letters. The IRS charges interest and a late payment penalty for each month you carry a tax balance.  The initial late payment charge is 0.5% per month, reduced to 0.25% if you get a payment plan.  That’s a 50% reduction in penalty which compounded over time, can translate into substantial savings.

Time is running out!​

When you owe money on your federal taxes, one of the common collection actions taken is IRS tax garnishment, typically on your wages or salary. Wage garnishment can leave a person with very little money on which to live. 

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