“but in this world nothing can be said to be certain, except death and taxes.”
Benjamin Franklin had it right. If there is anything just as inevitable as death in this world, it is that the government will want to tax you. Whether or not you agree with the taxes you pay or what the funds are used for, you still have to file and pay your taxes each year.
We’re all prone to mistakes. Maybe you put the wrong number down on your W-4 at work. Maybe you had some unexpected bonus income that you didn’t account for to pay tax on, and you have already spent all the money. Sometimes we find ourselves with a big tax bill, but lacking the capability to pay that bill.
If you find yourself unable to pay your taxes to the government, what should you do?
First Things First – Always File Taxes on Time
Your first reaction might be to avoid filing your taxes. If you can’t pay them , why bother, right? Unfortunately, this is the worst response you can take. It’s essential to file your taxes on time, especially if you owe money. This will help you avoid certain late penalties and interest. If you find yourself up against the deadline, you can file a tax extension, which gives you until October 15th to file your taxes with the IRS. Unfortunately, it doesn’t give you an extension to pay, just an extension to file. If you owe money, it is due by the standard tax filing date – normally April 15th each year.
If you can’t pay your taxes, you have a few options.
3 Ways to React to Being Unable to Pay Your Taxes
Here are three ways you can react to a big tax bill you cannot pay.
Work with the IRS
The absolute best thing you can do is to call the Internal Revenue Service and work with them to come up with a solution that works for everyone. You will still end up paying the debt, likely with some fees or interest involved, but you will still pay it back. The IRS has an entire department of people dedicated to working with individuals that cannot pay their taxes on time. Don’t ignore this resource.
Depending on how large the debt is you might be better off borrowing some money from other sources to pay your taxes immediately and pay down your other debt on your own schedule. You could use a tax payment service (find one at this official IRS page) and pay as little as 1.89% for using your credit card, plus any interest the credit card company charges you. Alternatively you could borrow from your 401k because the principal and interest payments are going back to you, not a financing company (just be aware of the pros and cons). Lastly, you could try borrowing money from family and friends, but you would have to explain your personal tax situation to them first.
Settle Your Tax Debt
If you owe a significant amount of money to the IRS, you might be able to settle your debt using something called an Offer in Compromise. While you see many commercials about settling your tax debt that make the promise sound simple and easy, it rarely is. For starters you have to put in an extensive application (imagine applying for a mortgage and having to lay out every dollar and asset you own; this is similar) and pay a $150 application fee. On top of that it can take 2 years to settle the debt, and that is if you get accepted. (A majority of tax debts are not settled so don’t count on this.)
The Only Way to Not React
The only way to not react is to ignore the debt. Sticking your head in the sand will not make any debt go away, especially one from the government. Penalties, fees, and interest will build up if you ignore this debt. Even if you can’t pay it, at minimum you should communicate with the IRS. They might just work out a payment plan you can afford that doesn’t cost you an arm and a leg.
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