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I Prepared My Federal Tax Return, and I Can’t Afford to Pay the Taxes that I Owe. Now What?
If you owe more money than you can afford to pay, don’t panic. There are steps that you can take to avoid major penalties from the IRS.
If you’ve prepared your 2018 federal tax return and realize that you owe a large amount to the IRS, you might think that the situation is hopeless. While it’s a stressful situation for sure, there are options to keep the IRS from calling (and to keep your blood pressure down).
Here are the basic do’s and don’ts when you have a hefty federal tax return balance:
1.) DO file your tax return(s).
If you’ve taken the steps to prepare your tax return, and found out that you owe way more than you thought you would, it might be tempting to not file your taxes at all. However, if you do that, it will only make matters worse.
Not only should you file your tax return, but it’s also imperative that you file on time. While it’s true that the IRS does implement a penalty for failing to pay, you’ll also incur a penalty for filing past the deadline (April 15th).
So even if you determine that you can’t pay what you owe in full, the first step is to file well before the deadline (ideally in January or February) so that you don’t get slammed with a late-payment penalty.
If you neglected to file your taxes last year and/or the year before, it’s important to file those along with this year’s tax return, as you’ve probably already accumulated interest from the penalties on the previous years’ taxes that you owe.
Once you’re up-to-date on filing, there are options for paying your current and past due taxes when you’re unable to pay the lump sum at one time.
2.) DO find out if you qualify for an IRS payment plan.
If you only owe a few thousand dollars, it might be beneficial to apply for a short-term installment agreement with IRS Form 9465. A short-term IRS payment plan gives you 120 days to pay the taxes that you owe.
It should be noted that you’ll still have interest applied to this, however, the fees will be much lower when avoiding the late-filing fees.
This is why it’s important to file this year’s tax return on time, so that your interest and fees will be kept at a minimum. Even with the interest that you’ll accrue from the IRS payment plan, it’ll be lower than the interest from a personal loan or credit card.
In addition to that, you won’t be receiving phone calls from the IRS, or worse, a notice that they’ve filed a federal tax lien against you.
You’ll need to calculate how much you owe, and whether or not you can pay it within the time frame allotted by the IRS. For example, if you know that you owe $4,000 this year, and you can afford to pay $1,000 a month (plus applicable interest), you’ll be able to pay your taxes in full within the 120-day/4-month period.
This would allow you to pay all of your taxes without getting into hot water with the IRS since you’d set up a plan where you’d agree to pay all of your taxes within the 120-day time frame.
3.) DO speak with a local bankruptcy attorney.
While some may only owe a few thousand dollars in federal taxes, many often owe tens or hundreds of thousands, which is impossible to pay off, even with an IRS payment plan.
While the IRS does offer a long-term payment plan, it’s only for those who owe less than $50,000. Even if you owe slightly less than that amount in taxes and back taxes, you’ll still be paying a lot of interest on those taxes.
If you owe more than $50,000 (or even an amount below that which is beyond your ability to pay), one of the best options is to file for a Chapter 13 bankruptcy. An experienced attorney who focuses on Chapter 13 bankruptcies can help you set up a repayment plan that would be much more affordable that trying to pay on your own.
Not only can you set up a reasonable and affordable tax payment plan through your bankruptcy filing, you’ll also be able to keep your house and your car by including those in your bankruptcy case as well.
While filing for bankruptcy may seem like a “last resort,” it’s actually a wise decision since you’ll avoid the risk of having your wages garnished and you’ll protect your valuable assets, such as your home and vehicle in the process.
4.) DON’T ignore your tax issues.
If you owe a large sum to the IRS, it’s tempting to want to bury your head in the sand and hope that it’ll all magically disappear. The reality is that things will only get worse the longer that you avoid filing and paying your taxes.
If you owe way more than you could possibly pay in one lump sum or in a short-term IRS payment plan, contact a local bankruptcy lawyer to see what your options are in regards to filing for bankruptcy.
At GSH Law Firm, we always offer free consultations, and are here to provide you with the most realistic options that will protect your bank account, car, and home. For more information, call (502) 435-2593 to find out if Chapter 13 bankruptcy is right for you.
Consultations are available on weekdays, evenings, and even Saturdays at two convenient Louisville locations. If you want to rest easy at night without worrying about the IRS coming after you, we’re ready to help!