Ask a CPA: What do I do when I can’t pay my taxes?

As CPAs in tax practice, we help our clients with all kinds of tax issues, from helping them plan to minimize their taxes to preparing their returns efficiently and accurately.  We’re also here to help when clients have trouble paying their taxes.

Here’s a point-by-point guide from our team of CPA tax practitioners on some of the matters for consideration when you can’t pay your taxes in full and on time.

File your tax return on time.

Whether or not you can pay some or all of your balance due, filing a complete and accurate return on time is the first step. Failing to file your return on time will cause you to incur late-filing penalties that do nothing but increase the amount you will eventually have to pay.  If you’re not sure whether your return is correct, consult a CPA experienced in tax practice for advice.

Look at your financial situation.

How much can you afford to pay the IRS? Consider your cash and other assets on hand, your debts and other obligations, and your monthly income and expenses to figure out how much you can afford to pay toward your current balance due now and how much you can afford to pay each month.

You may want to consider borrowing money from a bank, credit card company, family member or friend to pay your taxes. The interest and fees charged by these lenders are often less than IRS interest and penalties, and many people are more comfortable dealing with these lenders than with the IRS

When you’re calculating how much to pay IRS, don’t forget that you need to pay this year’s taxes, too, so that you don’t have a balance due next April. While interest and penalties accrue daily on your past-due balances, there are practical reasons why the most important taxes to pay may be this year’s taxes, not last year’s.

Calculating how much you can afford to pay on your taxes, how much the IRS will think you should pay, and selecting which year’s taxes to pay and when is complicated. Consult a tax CPA for help.

Choose a payment option.

You can pay your taxes with a credit card, debit card, check or electronic funds transfer. The IRS offers up to 120 days to pay your taxes in full automatically, but interest and penalties will continue to accrue until the balance is paid off completely. In addition, some of these payments options have processing fees charged by service providers. To review all of your tax payment options, go to the IRS Payment Options page online.

 If you can’t pay your taxes in full within 120 days of filing your return, you can apply for an Installment Agreement. This sets up a fixed monthly payment that can directly debit your bank account. An installment plan requires an application and (usually) a fee, but it prevents you from missing payments and avoids collection activity by the IRS.  There is a streamlined process for taxpayers who owe $50,000 or less, but this is a viable option no matter how much you owe.  See Payment Plans, Installment Agreements at the IRS website for more information, and consult your tax CPA for help.

Another option if you can’t pay the full balance of your tax debt is to make an Offer in Compromise to the IRS, which would allow you if approved, to pay less than the full amount you owe. In contrast to what you may have been led to believe by late-night infomercials, this can be a difficult and expensive process, and there is no guarantee of success. You should seek professional assistance from a CPA or attorney experienced in tax practice in general and with OICs in particular.

Don’t ignore the problem.

The most important thing to remember if you can’t pay your taxes is to take charge of the situation. In addition to filing your returns, considering your overall financial situation, and selecting the right payment option, be sure to read your mail and respond appropriately if you’re contacted. Taking action earlier is better than later and may forestall more intrusive collection activity.

Your first step, however, should be to hire a CPA or attorney practicing in tax. This is an important, complicated issue, and you need competent help.  Contact Crisler CPA if you have a tax payment problem.