What to do When You Can’t Pay Your Income Taxes: A 3-Step Plan

Man Punching Tax Debt Issues

March 15, 2017

It’s the least wonderful time of the year for millions of cash-strapped Americans thanks to three letters – I-R-S!

Income tax returns are due April 18, but what if you can’t pay your taxes?

File Your Return Anyway

File your return even if you can’t pay, then get ready to negotiate with the IRS and tighten your belt.  Because there are two things in life you can’t escape, and the Internal Revenue Service is one of them.

“In this world nothing can be said to be certain, except death and taxes,” Ben Franklin said.

And he said it almost 100 years before Congress passed the first tax-collection bill to help pay for the Civil War. The collecting agency did not even get its official name until 1918.

Unofficially it’s been called much worse a few billion times since. But as the Bible says, “Render unto Caesar what is Caesar’s.” In this case, we must render unto Trump what is Trump’s.

Your Three Step Plan

If the filing deadline arrives and you don’t have the money to pay, here’s a three-step plan to appease the IRS and avoid having a recurring tax nightmare.

Step One: Don’t Panic

“Don’t Panic.” Those are the first words on the government’s website. Easy for the IRS to say.

The natural inclination is to freak out when you get a bill from the government, because no bank or credit union or loan shark has as much collecting power. Uncle Sam can garnish wages, invade bank accounts, put liens on properties and throw you in jail. Al Capone murdered, robbed, racketeered and bribed his way to becoming America’s foremost gangster. The only thing the government could get him for was tax evasion.Same with Martha Stewart (well, she didn’t murder anyone), Wesley Snipes, Abbott and Costello and Pete Rose. Willie Nelson owed the IRS $16.7 million. He negotiated that down to $6 million, which prompted Nelson to put out the album “The IRS Tapes: Who’ll Buy My Memories?”

If the IRS can nail celebrities with their high-priced lawyers, what chance does the average American have of getting away with not paying their taxes?

Not much, though the odds may be a little better than Nelson’s since the IRS likes going after big fish. It audited only 0.7% of returns in 2016, but taxpayers making more than $5 million had a 19.4% chance of being audited. That continued a downward auditing trend due to employee cutbacks.

“The portion of our full-time workforce that has been lost since 2010 included over 5,000 key enforcement personnel,” IRS chief John Koskinen told the National Press Club. “These are the people who audit returns and perform collection activities.”

So odds are you won’t get audited, but if you don’t even bother to file, it’s a crime with no statute of limitations. Chances are the IRS will eventually find you, and the last you want is to be hit with an overdue tax bill.

The late filing penalty is usually 5% of tax owed for every month your filing is late, up to five months (25%). If you owed $10,000, you would be socked with a $2,500 penalty for filing five months late.

After that, interest is charged until your account is settled. The rate is usually about 6%, though that can fluctuate.

Step Two: Consider Filing an Extension

You can file for a six-month extension (Form 4686), which is almost automatically granted unless you have a bad history with the IRS. That will help you avoid paying a penalty, but you’ll still owe interest.

You can also negotiate for an installment agreement or even a reduced settlement. Call 1-800-829-1040 to discuss your options with the IRS.

Once you file, even if it’s just for an extension, you get to the next step:

Step Three: Figure Out How to Pay the Tax Man

Unlike Nelson, most of us can’t cut an album to get out of debt, but you will have to find a way to generate extra income somehow.

Ideally, you will have an asset like a boat or car you can sell, or stocks you can cash in. Failing that, you could try borrowing from a bank, credit union or online lending service. That could be difficult since if you don’t have money to pay taxes, chances are you’ll be a little short when it’s time to pay back the loan.

Another option is borrowing from a friend or family member. The difficulty there is A) finding one, and B) not ruining that relationship if things go south.

If you have a home equity line of credit, you can tap into that. Raiding your 401(k) is an option, though the taxes and 10% early withdrawal penalty are killer. Plus, chances are you’ll never repay it to your retirement fund.

Credit cards are another option, though do the math. The Federal Reserve reported in January 2017 that the average interest rate on a credit card was 12.41%. When you throw in fees and other charges, it might be wiser to pursue an IRS installment plan.

How do I avoid future IRS payment dilemmas?

You really have two options – get your financial house in order or move to a house in a tax haven like Monaco or Bermuda.

That’s what the Rolling Stones did in the 1970s to avoid England’s 95% income tax rate. The problem with that is you’re probably not a member of the Rolling Stones, so you’ll have to stay put and plan for next year’s IRS bill.

That comes down to building a budget, and not spending more than you make. It sounds simple, but it’s a struggle for millions of Americans.

Many rely on credit cards, which is okay if you pay them off monthly. Most people don’t pay it all off, which leads to poor credit scores, higher interest rates and more credit card debt.

As Ben Franklin said, you can’t avoid death or taxes. But with proper planning, you won’t feel like jumping off a bridge the next time the IRS comes calling.


Sources:

(NA)(2017, Jan.) Board of Governors of the Federal Reserve. Retrieved from https://www.federalreserve.gov/releases/g19/current/

(NA)(2016, Sept. 1) What if I can’t pay my taxes? Retrieved from https://www.irs.gov/uac/what-if-i-cant-pay-my-taxes

(Adamson, Thomas)(2012, Dec. 13) Pennies over patriotism? Stars move to tax havens. Retrieved from http://www.sandiegouniontribune.com/sdut-pennies-over-patriotism-stars-move-to-tax-havens-2012dec13-story.html

 

Joey Johnston
jjohnston@incharge.org

Joey Johnston has more than 30 years of experience as a journalist with the Tampa Tribune and St. Petersburg Times. He has won a dozen national writing awards and his work has appeared in the New York Times, Washington Post, Sports Illustrated and People Magazine. He started writing for InCharge Debt Solutions in 2016.