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What to Do When You Can’t Pay Your Taxes

Woman at a computer who owes taxes

1. File on time.

This can be the hardest step—and the most important. The IRS charges penalties for failure to file taxes and for failure to pay them. Avoid the late-filing fee, even if you can’t pay what you owe. For 2018, tax returns are due on April 17, which gives you two additional days to get your paperwork in.

2. Contact the IRS to work out a solution.

To talk with the IRS about payment options available to you call 1-800-829-1040. Some options include delaying paying in full for up to 120 days or working out an installment plan. Either option will cost you extra money in interest and/or fees, but they are available to you.

3. Decide if you can pay your taxes in 120 days and set up a payment agreement.

If you will be able to pay your taxes in full within 120 days, the good news is that you will not be charged a fee to do so. However, your balance will accrue interest until you have paid your taxes in full. You may be able to set up your payment agreement through the IRS’s Online Payment Agreement (OPA) form.

4. If you need more than 120 days, look into IRS installment plans.

The IRS will accept monthly payments from a number of sources: direct debit from your bank account, payroll deduction from your employer, online credit card payments, and more. Each of these options comes with fees depending upon the method you choose. You will be charged less for setting up a direct debit agreement, for example, than if you choose to pay via payroll deduction. The amount you pay each month will be determined by what you can afford, with the minimum amount being the amount you owe divided by 72.

5. If you are at or below the poverty line and/or experiencing financial hardship, ask the IRS for reduced fees and to delay sending your account into collections.

If you are living at or below the federally determined poverty level (for example, on an income of $24,600 for a family of four in 2018) gather your documentation and call the IRS at 1-800-829-1040.

If you need to arrange to pay your taxes in installments, you will be charged a reduced user fee of $43.

If paying in installments would prevent you from meeting your basic living expenses, you can request that the IRS delay putting your account to collections until you are able to begin paying your taxes. While your account will be reported as “currently not collectable” you will still be accruing penalties and interest until you have paid off your debt in full.

6. Consider the pros and cons of paying your taxes with a credit card.

The IRS does accept credit cards though not all forms are eligible for payment by credit or debit card, and there are limits on how often and how much you can pay. Even if you are eligible to pay with a credit card, however, consider that the interest your credit card will charge you is likely higher than that charged by the federal government.

7. Be more prepared next year.

Mistakes happen. The unexpected happens. Consider it a bad year.  Going forward, however, pledge to never find yourself in the same situation again by taking pre-emptive measures such as building your emergency savings, working with a tax advisor, or talking with a financial coach.

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