Q: What will happen and what should I do if I cannot pay my taxes by the filing deadline?
A: Don't let your inability to pay your taxes in full keep you from filing your tax return on time. An extension of time to file your return doesn't also extend the time to pay your tax bill.
Even if you can't pay your taxes in full, timely filing your return and making the largest partial payment you can make will save substantial amounts in interest and penalties. Additionally, consider requesting an installment payment arrangement which will keep the IRS from instituting its collection process against you.
Penalties and Interest
The “failure to file” penalty accrues at the rate of 5% per month (maximum of 25%, reached after 5 months) on the amount of tax owed. The “failure to pay” penalty accrues at the rate of 0.5% per month (maximum of 25%, reached after 50 months) on the amount due. In total, these combined penalties can increase your unpaid liability by another 50% in less than five years. Interest will also be charged on your late payment.
Borrowing to Pay Tax
Given the rate at which penalties and interest accrues, consider ways to borrow money to pay the taxes. The rate of interest on a loan may be less than IRS penalties and interest.
You could look to a bank for a loan, but such loans are not likely to be made on favorable terms to a hard-pressed taxpayer. Moreover, interest on a loan to pay taxes is nondeductible personal interest. In contrast, if you can take out a home equity loan and use the proceeds to pay off your tax debts, you will probably be paying at a lower rate than with other types of loans, and the interest payments will be deductible even if the loan proceeds aren't used in connection with the house.
Installment Agreement
Another alternative is to defer your tax payments by requesting that the IRS enter into an installment payment agreement with you.
The IRS is required to enter into an installment agreement at your request if the following apply:
- the tax liability is $10,000 or less;
- within the prior 5 years you have not (i) failed to file returns or pay taxes, or (ii) entered into a previous installment agreement;
- the IRS determines the tax liability cannot be paid in full;
- the installment agreement provides for full payment within 3 years; and
- you agree to comply with the tax laws during the agreement period.
Count on Your CPA
As you start your adult financial life, it’s a good idea to get to know your local CPA. He or she can help you understand your choices and make the best decisions for your financial future. You may contact me at (409) 892-0233 or (409) 883-5306. My email address is brad@ekc-cpa.com.
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- Penalties and interest
- Borrowing to Pay Tax
- Installment Agreement
- Count on Your CPA
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Beaumont: 3440 Eastex Fwy., Beaumont, TX 77703 Ph: (409) 892-0233 * Orange: 2250 Gloria Dr., Orange, TX 77630 Ph: (409) 883-5306
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