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Help, I Can't Pay my Tax Bill!

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Help, I Can't Pay my Tax Bill!I sat down at the computer desk, installed my tax preparation software and nestled in for a couple of hours of data entry. It was time to do my taxes.  

I filled out my family information, and gross income. The red number in the upper right corner of the screen indicated that I owed a rather large amount of money. I wasn't surprised as I had expected to owe money to the government this year, but the number was pretty big. 

No problem, I thought to myself, I hadn't gotten to the deductions part yet.

As I continued answering the questions, and filling in numbers, the amount I owed was going down, but it soon became obvious that I when it was all said and done, I was going to owe more than I had been planning for.

When I had finished, the red number that slapped me in the face was staggering, and I didn't have the funds to pay it in full. I sat there staring at the screen, not knowing what I was going to do.  

I gave the IRS a call, explained my situation, and was given the following information:

The first thing that I was advised was to file my tax return even if I cannot pay my taxes. If I didn't file my return on time, failure to file penalties would begin to accumulate for each month that my return is not filed in addition to failure to pay and interest penalties.

The gentleman on the phone then asked if I could pay my taxes within 120 days. If so, then the IRS would grant me an extension to pay. I could send in money as often as I'd like, or one lump sum as long as the IRS got the full amount within 120 days.

If I could not pay my taxes within 120 days, I could setup an installment plan. There is a one-time charge to setup the plan, and the amount varies if you are going to pay via check, or direct debit. It is also important to note that if you setup an installment plan, you will also begin to accumulate interest on your tax debt. 

I was worried whether my tax debt would be reported to the credit agencies, and cause my creditors to potentially kick me off my debt management plan because a new debt showed up on my credit report. I was told that the only time the government reports anything to the credit agencies is if you completely ignore your tax bill.

Note: I have purposely omitted any information on penalty amounts or interest rates as they are subject to change from year to year.  For more information call the IRS, or refer to their website.

The important things to take from this are:

  • The worst thing to do is to ignore a tax bill. Penalties and interest will continue to accumulate.
  • The government offers assistance to those who cannot pay their tax bill. If needed, use them.
  • If you owe taxes, steps need to be taken to correct the amount of taxes paid each month to avoid another tax bill next year.

Using an extension to pay, I was able to take care of my tax debt with minimal fees and penalties. I also took the necessary actions to ensure that I didn't find myself in a similar situation this year.

I was surprised to discover the government had these programs setup to help citizens deal with their tax debt, but I was glad they were there as it really helped me out of a bind. 

If you find yourself in a similar situation, they may be the answer you're looking for as well.

Related Links:

How Adjustable Rate Mortgages Can Affect Your Taxes

Tax Time Doesn't Have To Be Painful!

Tax Season-It All Add's Up!

 

Travis Pizel, My Journey Out of Debt, CareOne Customer BloggerTravis Pizel

Travis is a contributing writer for the My Journey out of Debt blog and is a very active member of the CareOne community forums. Travis is currently enrolled in a CareOne Debt Management Plan (DMP). Travis very candidly shares his personal journey to pay off his debt and the tips he's learned along the way. As a father and husband he provides a unique perspective on balancing debt, finances, and family. You can also follow along with Travis on his personal blog, Our Journey to Zero. Compensated Blogger for CareOne Debt Relief Services.

Follow Travis on Twitter @DebtChronicles

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  • I'll go against the grain on this one and disagree with you a little bit. :)

    I would say to only file your taxes and do a payment plan IF you are ABSOLUTELY POSITIVE you can make the payments. Otherwise it's better not to file until you have the money to pay in full. When I was a kid, my parents owed quite a bit of money one year. The payment plan (which was admittedly less flexible than the ones offered today) was more than they could afford but they didn't have much choice. The fees they paid for making less than the required payment were far greater than the penalties for filing late. And the IRS decided wage garnishment was a better idea. I remember eating a LOT of pasta that year.

    I'm all for being a responsible citizen and (of course) paying your taxes, but I think it pays to weigh those decisions carefully to make sure they won't bite you in the long run.

  • Travis - I empathize with you. By just running some preliminary numbers myself yesterday it looks like we'll be paying in around $2000.  I hope I'm wrong though.  I knew this could be a possibility since we sold our house last July.  I definitely would take the 120 days versus a payment plan.

  • Andrea, great comment - I'd like to explore further.

    I completely agree with you that if you do not pay the correct installment amount (or pay late) you get slapped with pretty hefty fees.  I was told that even if you're one day late with your installment payment, you get nailed with a pretty hefty penalty.  

    That being said, I still think the best advice would be to file.   If you file, but don't pay, you'll accrue interest and failure to pay penalties.  If you don't file, you'll get nailed with interest, failure to pay AND failure to file penalties (for each month).  

    When I talked to the IRS, and was exploring options, they actually asked me how much I thought I could afford each month...granted I'm sure there's some guidelines as to how much they'll accept,  but it does seem like things are a bit more flexible.

    For me, and my own personal situation, not doing anything would have been a very poor choice given the reporting of such a debt to my credit report would likely have been frowned upon by my creditors in my Debt Management program.

    I think your last sentence is really the most important.  If you cannot pay your tax bill, just know there are indeed options, and investigate them fully before selecting a course of action.

    Thanks so much for your thoughts and discussion!

  • Hi Jackie, thanks for sharing your situation.  The 120 days was a good option, as we incurred very little in the way of penalties and interest.  We almost didn't get it all paid off, and called to inquire about a payment plan.   In the end, we didn't need it...but the crux of what I'm trying to say is, if you take the 120 day extension, you can always setup an installment plan at the end of 120 days too (although you will get charged interest and penalties from the filing date....).

  • Hi Travis.  I think that the single biggest thing to take from this (and maybe disagree with Andrea a bit, if I understand her correctly...): The deadline for FILING your taxes is April 15th (or 17th or whatever they changed it to). That's not at all the same as the deadline for PAYING your taxes.

    The worst thing to do is not file on time. As I understand it, file your taxes on the last day possible, with no payment.

    Then the IRS (la, la, la) gets around to looking at your return, and makes sure everything is okay.

    Then they send you a bill. Like you call the refrigerator guy, he fixes your fridge in a few days, then sometime after that you get a bill, and sometime after that is when it is due. And at THAT point you start dealing with payment plans.  

    it's only February. Have your stuff prepared. Wait until the middle of April. Then file, but don't send any money. The IRS will get around to sending you a bill for what you owe.

    The law says you have to FILE by April, not PAY by April. Unless something changed in the last few years?

    I hope my information isn't totally incorrect, and I hope that makes some sense, and I hope that helps ease your worries somewhat.

    Take care.

    Mike

  • I think you're partially correct, Mike - from my understanding of the conversation I had with the IRS last year:

    I agree that I believe the best course of action is to file, even if you cannot pay the amount due - to avoid "failure to file penalties."  I also agree that if you do not pay the amount due that the IRS will eventually contact you and send you a bill.  HOWEVER, I  believe that technically your taxes are indeed due on April 15th (or whatever day the actual deadline falls on for a particular year).  Therefore, when the bill eventually comes from the IRS, it will include failure to pay penalties and interest tacked on.

    At that point, I think it's wise to simply call the IRS to get your options (ie, payment extension of 120 days, installment including what the monthly payment would be, etc). Then say "thank you, have a great day, I'll weight my options and call back."  Then determine your best course of action.

  • I agree with your plan of action Travis. While Andrea's decision is good for her situation, it's actually very bad advice in general. I've had 10 years of dealing with the IRS, with personal taxes and small business returns and I've learned they will work with you on most cases.

    All you have to do is inform them of your situation (like you did) and not ignore everything. If you can't pay the whole return, you should definitely still file by April 17th this year. Otherwise it looks like you're purposefully dodging filing and paying the IRS. And of course filing on time will lessen the interest added to the account and take away the failure to file penalty.

  • Thanks for weighing in, Carrie (Careful Cents).  I appreciate you taking the time to lend your expertise to the discussion.  I'd like to mention here to the readers that I talked with Carrie and got her permission to mention (although she alluded to it in her comment) that her field of employment is tax return preparation.

  • I think the best option is to always prepare for what's coming - get your taxes done and call the IRS if there is going to be an issue paying back your taxes. Honesty (including honesty with your self) is always the best policy.

  • Great point, saracarr....getting your taxes done as soon as possible so you know what you're facing is extremely important.  Hiding from it by waiting until the last minute isn't going to help things at all.  Thanks for sharing your thoughts!

  • Wow, what a great discussion.  I could have used this a few months ago when I was dealing with the IRS :-).  I did learn a little about how they do work and it actually eased my mind to know they do accept a payment plan and will work with you.  I am however thankful that my situation didn't end up warranting that.  For me the IRS thought they over paid me on my 2009 return.  By the time they contacted me they had already added interest for the year and a half that they figured they overpaid.  I am thankful that after I sent them all the information they requested that they sent me a letter stating that I owed nothing and the case was closed.  I have to admit that at first I was apprehensive about going up against them.  I almost threw up my hands and started a payment plan.  Thank goodness I decided that the worst that could happen was they would have added a few more months of interest while they made their decision.  It is nice to know they are not as scary as I first thought!!  Thank you for sharing t-pizel!!

  • I'm glad to hear things played out in your favor with the IRS, mdavis1964.  You make another very good point as we enter the heart of tax season - if contacted by the IRS, that doesn't automatically mean you owe them money.  Stay calm, gather your documentation and see where it leads.  

    Thanks so much for sharing your experience!

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