During tax time, it’s fairly common for people to realize that they don’t have the financial resources to pay the full or even a partial amount of their tax obligations. In these situations, the logical action for many is to avoid filing taxes altogether. After all, if you cannot pay the bill, what’s the point in filing?
It’s important to understand, however, that there are a number of reasons why you should file your taxes no matter your financial circumstances. The Internal Revenue Service not only charges you interest for paying late taxes, but also penalizes you 5 percent of the total amount you owe per month for up to five months. Even if you are unable to pay, at least filing your return will help you avoid this major penalty.
If you’re facing this challenge, the following options are available to you:
- Set up an installment agreement: As long as you don’t owe more than $25,000 in combined taxes, interest and penalties and the IRS does not have records showing you haven’t filed all your past due tax returns, you are eligible for an installment plan. The IRS is willing to work with you on setting up a payment plan via installments for up to 60 months. Even if you do owe more than $25,000, you may have some room to negotiate with the IRS.
- Request an extension for undue hardship: If you can show evidence that paying your taxes on time would cause you undue hardship, such as losing property, you may be eligible to file for a payment extension. This will give you an extra six months to pay the amount you owe. While the amount will still accumulate interest over the extension period, you won’t be charged any penalties.
- Make an offer-in-compromise: Because the IRS would prefer to receive even a partial amount of what you owe over nothing at all, the agency may accept an offer-in-compromise (OIC). If you can convince the IRS that you are not able to pay the full amount, that your tax liability may be inaccurate or that payment in full would cause you economic hardship or unfair difficulty, the agency may accept your offer to pay only a partial percentage of what you owe.
- Pay with credit: Although it is never advisable to incur debt, the interest rate on a personal bank loan, home equity loan or even your credit card may be less than the interest and penalties the IRS may impose on you for late taxes.
No matter your situation, it’s always safer and more responsible to file your tax return and follow one of the above methods than to jeopardize your future by missing the deadline.
BoltNagi is an experienced and widely respected tax planning law firm serving clients throughout the U.S. Virgin Islands.