What happens if you (or someone you know) can’t pay taxes on time?

Making payment on time for 2019 tax year could be especially tough given the difficult circumstances COVID-19 has brought to many of us. You may be struggling with significantly reduced income due to the downturn of the economy. You may be concerned about the interest and penalty for not making the estimated tax payment in timely manner.

Remember an extension of time to file your return doesn’t mean an extension of time to pay your tax bill.

However, don’t let the inability to pay your tax liability in full keep you from filing a tax return properly and on time. Taking smart steps can keep the IRS from instituting punitive collection processes.

Let’s look at the options.

Common penalties:

The “failure to file” penalty accrues at 5% per month or part of a month (to a maximum of 25%) on the amount of tax your return shows you owe. The “failure to pay” penalty accrues at only 0.5% per month or part of a month (to 25% maximum) on the amount due on the return. (If both apply, the failure to file penalty drops to 4.5% per month (or part) so the combined penalty remains at 5%.) The maximum combined penalty for the first five months is 25%. Thereafter, the failure to pay penalty can continue at 0.5% per month for 45 more months. The combined penalties can reach 47.5% over time in addition to any interest. 

Undue hardship extensions:

I emphasize to our clients as often as possible that an extension of time to file your return doesn’t mean an extension of time to pay your tax bill. A payment extension may be available, however, if you can show payment would cause “undue hardship.” You can avoid the failure to pay penalty if an extension is granted, but you will still be charged interest. If you qualify, you’ll be given an extra 6 months to pay the tax due on your return. If the IRS determines a “deficiency,” the undue hardship extension can be up to 18 months and in exceptional cases another 12 months can be added.

Borrowing money:

If you don’t think you can get an extension of time to pay your taxes, borrowing money to pay them should be considered. You may be able to get a loan from a relative, friend or commercial lender. You can also use credit or debit cards to pay a tax bill, but you’re likely to pay a relatively high interest rate and possibly a fee.

Installment agreement:

Another way to defer tax payments is to request an installment payment agreement. This is done by filing a form and the IRS charges a fee for installment agreements. Even if a request is granted, you’ll be charged interest on any tax not paid by its due date. But the late payment penalty is half the usual rate (0.25% instead of 0.5%), if you file by the due date (including extensions).

Avoid serious consequences

It’s important to file a properly prepared return even if full payment can’t be made. Include as large a partial payment as you can with the return and work with the IRS as soon as possible. Of course, Team Encore will help to figure out the amount to pay. The alternative may include escalating penalties and having liens assessed against your assets and income. Down the road, the collection process may also include seizure and sale of your property. This could be a nightmare, but In many cases, it can be avoided by taking advantage of options offered by the IRS.

The extension deadline to file and pay is fast approaching.

Reach out to us as soon as possible and we will work on the best option available.

The more you know, the better you can cope with your tax situation. We are here to help!