Although paying taxes is a fundamental civic duty, there are instances when people and corporations are unable to fulfill their tax commitments. Not being able to pay your taxes can have major repercussions, regardless of whether it was caused by unforeseen financial difficulties, poor management, or a simple oversight.
In this article, we will explore what happens if you can’t pay your taxes and provide guidance on how to navigate this situation.
Consequences of Not Filing or Paying Taxes
If you encounter difficulties, it’s crucial to avoid submitting your tax return or neglecting your tax payments. The government possesses the power to forcibly confiscate your assets in cases of unpaid income taxes. In the most severe instances, you could even face imprisonment. Various situations can result in fines and accrued interest. The primary ones involve submitting your tax return after the deadline and making late tax payments.
Late tax filing
If you are unable to file your tax return by the due date, you should submit Form 4868 to the IRS as soon as possible to request an extension. It is important to note that this extension is limited to filing and does not extend the deadline for paying your tax liabilities. You must still pay any unpaid taxes by the original due date. Failure-to-file charges are penalties assessed when a tax return is not filed, whether it is filed late or not at all. For each full or partial month of delay, these penalties go up at a rate of 5% of the unpaid taxes, with a limit of 25% after five months.
A minimum failure-to-file penalty of $450 or 100% of your total tax liability, whichever is smaller, will be assessed if your return is submitted more than 60 days after the due date (including extensions). Holding off filing your taxes—with or without a deadline extension—is financially disadvantageous. It’s advisable to file your tax return even if you can’t pay your tax debt by the due date to avoid extra failure-to-file penalties along with failure-to-pay fines and interest.
Late Tax Payment
You might consider submitting your tax return without paying the amount you owe, but be aware that failing to pay your taxes by the deadline leads to the accumulation of interest and penalties on the outstanding sum. The interest for failure to pay is based on the federal short-term rate plus 4%, compounded daily after the due date, regardless of whether you’ve filed a time extension for your return.
Eventually, the government will send a letter demanding payment for your unpaid taxes. Ignoring this may result in the IRS filing a Notice of Federal Tax Lien, signalling to creditors that the IRS has a claim on your personal property or assets to secure its interest. If the debt remains unpaid for an extended period, the IRS might resort to levying your assets, which includes garnishing wages, seizing bank account funds, or taking and selling property like vehicles or homes.
In the most severe cases, the IRS may pursue criminal charges for tax evasion, a serious offence that could lead to up to five years in jail. It’s advisable to take prompt action if you receive an initial late payment letter and work with the IRS to settle your taxes as soon as possible, as this is the best course of action to avoid further consequences.
Tips to Help You Pay Your Taxes
What Happens If You Can’t Pay Your Taxes? Here are some solutions to help you pay your taxes if you find yourself in this situation:
Proper financial planning and budgeting
Preventing tax debt in the first place is often the best strategy. Plan your finances wisely and create a budget to make sure you have money put aside for your tax obligations. Create a savings plan, track your expenses, and stay organized with your financial records to avoid unexpected tax surprises.
You can ask for an extension if you need additional time to file your tax return. You will have an additional six months to file your return if you request an extension, but you will not have an extension to pay your taxes. To avoid fines and interest, you must still calculate your tax liability and pay by the original tax date. Extensions are beneficial if you need additional time to collect financial records or if you expect a filing delay.
If you’re facing a sizable tax payment and don’t have the money to pay it right away, you might think about borrowing money from several sources. You might be able to borrow money from your retirement account, your home’s equity, or a personal loan. It’s important to thoroughly analyze the advantages and disadvantages of each of these solutions because each has a unique set of risks and requirements.
Setting up an instalment plan with the tax authorities is one of the most prevalent choices for taxpayers who are unable to pay their taxes in full. Depending on your circumstances, you may be able to work out a monthly payment plan to pay off your tax burden over time. Remember that there may be penalties and interest costs associated with instalment plans, so carefully understand the conditions.
Offer in Compromise
The Internal Revenue Service (IRS) in the United States offers the Offer in Compromise (OIC) program, which is aimed at assisting individuals and corporations in settling their tax liabilities for less than the entire amount owed. To be eligible for an OIC, you must show that paying your tax bill in full would cause you considerable financial hardship. When deciding whether to accept your offer, the IRS will assess your ability to pay, income, expenses, and asset equity.
Frequently Asked Questions
What happens if I ignore my tax debt?
Wondering What Happens If You Can’t Pay Your Taxes? Ignoring your tax debt is not a good idea. If you don’t address your tax obligations, the tax authority may take enforcement actions, such as placing a lien on your property, garnishing your wages, or seizing your assets.
Is there a penalty for failing to pay taxes on time?
Yes, penalties exist for neglecting to pay your taxes on time. Penalties may include late payment costs as well as interest charges on the outstanding balance. These penalties can add up over time, making it more difficult to manage your tax burden.
Should I seek the advice of a tax professional if I am unable to pay my taxes?
If you are facing a tax debt that you are unable to pay, consulting with a tax professional, such as a CPA (certified public accountant) or tax attorney, can be very helpful. They can assist you in exploring your alternatives, negotiating with tax authorities, and providing assistance on how to successfully manage your tax liabilities.
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