Posted by Income Taxes and Bookkeeping LLC

What To Do if You Can’t Pay Your Tax Debt

What To Do if You Can’t Pay Your Tax Debt

While one can avoid many things in life, tax payment is not one of them. Millions of Americans owe Uncle Sam their taxes, while others are slammed with penalties every year. 

However, it is essential to take the necessary tips to get rid of your tax debt and reduce it if possible. You need this to avoid any tax penalty that might come at you with excessive tax bills in the future. 

Here are the tips to adopt if you find it difficult to pay your tax debt:

  1. Even if you cannot pay, file your taxes

In case you determine that you owe Uncle Sam, you must file. Not filing will end up complicating issues for you. The penalties for not filing can be extreme, which makes it critically important to file. 

There is a monthly penalty of 5% for Americans who refuse to file, which could rise to 25% of your entire tax balance. This could worsen your tax debt in the long run. 

If you need more time to file, you can request an extension. However, it is in your best interest to pay the estimated tax as much as you can by the April deadline. 

  1. Make a Payment plan or consider other options.

Uncle Sam offers some options to taxpayers that cannot completely pay their taxes within 120 days. You can consider any of the options:

Ask for a Payment Plan 

Also called an installment agreement, this is a long term payment plan recommended for people who need more than 120 days to get rid of their tax balance. However, there is a high possibility of having penalties alongside interest to your tax debt. Besides, this option is only for people with a tax debt of below $50,000 – interest and penalties inclusive.

Delay Payment 

One can temporarily delay payment, provided one can prove that paying such tax debt will prevent you from meeting your basic needs, and make your life unnecessarily hard.  This, however, does not completely exclude you from paying the tax. With time, however, Uncle Sam will request payment once your financial situation improves. Also, note that you will have to pay interest and penalties. 

For this approach to work, one needs to give a financial statement which proves that one has no financial capacity to pay the tax. If Uncle Sam agrees, they will stop all collection action for a period. However, you will still have to pay with time.


Consider Uncle Sam to Settle for Less than you Owe

The "offer in compromise" program allows owing taxpayers to settle their tax debt with less than what they originally owed. Before one can qualify, it is essential to prove that paying such debt will trigger severe financial hardship. With this, Uncle Sam reduces the tax debt so that you end up paying less.

  1. Consider Getting Help from a Professional 

Tax debt comes with many tricks. As a result, the expertise of a certified public accountant or tax professional can be invaluable, as they will ensure you handle the tax situation in the best way. 

In dealing with Uncle Sam, you are better off having the backing of an expert like a CPA or tax professional. Such experts can help open one to opportunities in terms of cash flow that might not be possible for you to see alone. 



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