Financial Fitness: What to Do If You Can’t Afford to Pay Your Taxes
April is National Financial Literacy Month, which makes it the perfect opportunity to do a financial check-up and learn how to improve your fiscal health. In this article, MarketWatch will offer advice on how to save, invest and spend money wisely. In addition, we’ll provide guidance on how to handle a situation where you can’t pay your taxes.
Tax Day, the April 18 deadline for filing your taxes, has come and gone. But what if you simply don’t have enough money to pay the taxes you owe? As Americans contend with pocketbook issues such as inflation and recent layoffs, more people than ever might be asking that question this year. Fortunately, there are things you can do, like paying the Internal Revenue Service in installments, either through a buy now, save later (BNPL) plan or through the IRS’s own installment plan.
What is the IRS’s Installment Agreement?
The IRS’s installment agreement allows an individual or business to pay their tax liabilities over time. Taxpayers enter into millions of installment agreements every year, making that the most common collection alternative for those who are unable to pay what they owe in full, according to Erin M. Collins, the National Taxpayer Advocate, who runs an independent taxpayer-assistance operation within the IRS. There are short-term payment plans up to 180 days, as well as long-term plans known as installment agreements that let you pay your tax bill over a couple of years. Although the IRS has a payment plan, there are caveats.
How Can You Apply for This Plan?
You can apply for the IRS’s installment plan online, by phone, by mail or in person. Short-term plans require no setup fee, but the combined amount of tax, penalty and interest should be lower than $100,000. Longer installment payments charge $31 for a setup fee if you agree to enroll in a monthly automatic withdrawal system, $130 if you pay it every month online, or $225 if you pay by mail, over the phone or in person. The IRS can waive or reduce the setup fee for low-income taxpayers whose earnings are at or below 250% of the federal poverty level. For most states, the federal poverty line is $24,860 a year for a household of three. For tax year 2022, taxpayers established nearly 2.4 million new installment agreements and paid $13.8 billion toward all installment agreements. That’s some 10,000 more cases than the previous year, which itself was 29% more than in tax year 2020, the agency’s data show. Although there are four types of installment plans, the IRS is more likely to put individual applicants into the streamlined installment agreement, tax experts say.
Am I a Suitable Candidate for an Installment Agreement?
Borrowing money from the IRS is not for everyone. Penalties and fees can make it a more expensive option, said Nina Olson, executive director and founder of the Center for Taxpayer Rights. Daily compounding obviously means much higher interest payments as compared to credit cards and mortgages which accrue interest rates monthly. The streamlined installment agreements also have the highest default rate: People tend to overestimate their ability to pay off tax debts, and they tend to say yes to the IRS. People sometimes feel pressure to sign up. But not everyone can get a loan from a bank, and others don’t have a credit card with affordable interest rates. If you can find another source to pay the IRS, do that, Olsen added. However, if you can’t, there are a number of payment alternatives. Note that “the resulting required monthly payment bears no relationshipSponsored Product to what the taxpayer can actually afford to pay.”
What Are Other Payment Options for Low-Income People?
According to Olson, streamlined installment agreements may not be the best option for lower-income people or those with special needs, or for people who are taking care of a family member. Olson recommends three other optionsSponsored Product, including applying for an “offer in compromise,” where people ask the IRS to settle the tax debts for less than the full amount they owe. It requires the applicant to provide financial information such as assets, mortgage, income and expenses, and the IRS then will decide what a reasonable collection amount is. For someone whose income is below their basic living expenses, a financial standard calculated by the IRS, the agency will report the account in question as “currently not collectible.” Even a “currently not collectible” designation doesn’t mean the debts go away. The IRS will keep an eye on the person’s financial situation and notify the person if it sees that their situation has improved. If someone is filing for bankruptcy with the IRS, they need to find a bankruptcy attorney who also has expertise in tax policy, because the timing of the filing is essential for discharging tax debt.
Now that you know more about IRS Installment Agreements and other payment optionsSponsored Product available, you can make the best decision for you based on your financial situation. The cardinal rule is to not do nothing, not engaging means it’s just going to get into the automated collection system. You need to engage with the IRS, because not engaging could lead to automated garnishment of your paycheck or your bank account. If you have any further questions or concerns, don’t hesitate to contact the IRS directly.