Admit it. At some point during tax preparation, a dangerous thought sometimes crosses your mind: “What if I just don’t file?” And while you likely file your taxes anyway, you may wonder what happens if you can’t pay your taxes or if you just don’t file at all?
Whether you skip filing the paperwork or just don’t pay, that’s called tax evasion, and it can get you into serious trouble, including racking up penalties and even jail time. But you can prevent such a sticky situation — even if you can’t afford to pay.
Pro tip: If the thought of doing your taxes makes your stomach uneasy, look into tax preparation software from H&R Block to help. They’ll make the process simple and you won’t need to worry about the consequences of not filing.
Passing Up the Tax Paperwork
First, not filing and not paying are two very different violations with different penalties. If you don’t fill out the forms and send them in, the IRS can still determine your tax liability based on your W-2s, 1099s, or other tax documents.
Passing the work of preparing your tax return on to the IRS certainly sounds appealing, but it’s not a good idea, especially if you want to minimize the amount you have to pay. That’s because the IRS doesn’t have information on many deductions you might be able to claim on your return. For example, they don’t know whether you’re eligible to claim the home office deduction or made charitable donations during the year, and they’re not exactly going to look for extra tax deductions on your behalf. As a result, your final tax bill can end up weighing heavily in the federal government’s favor.
After they’ve done their calculations, the IRS mails you a notice of deficiency along with a substitute for return (SFR) — essentially its version of your tax return. It requires you to either accept the tax return it sent, submit one you completed, or fill out a form stating why you don’t need to file a tax return at all. You have 90 days to respond to the notice of deficiency. If you don’t, the IRS sends you a bill based on the SFR. If you don’t pay that bill, the IRS begins the collection process, which can result in financial penalties and criminal charges.
Those 90 days aren’t a tax holiday. During that time, your unpaid taxes rack up serious fees and interest charges. You get slapped two kinds of penalties:
- A failure-to-file penalty of 5% of your unpaid tax for each month or part of a month your return was late
- A failure-to-pay penalty of 0.5% of the unpaid amount for each month and part of a month you don’t pay, up to a total of 25% of the original amount owed.
For more information, read our article on penalties for filing late.
Though the financial penalties for not filing or not paying on time are steep, you generally don’t need to worry about major federal charges of tax evasion unless you’re intentionally avoiding the IRS. Criminal tax evasion involves not only not paying your taxes, but also demonstrating a willful attempt to avoid paying and taking specific actions to avoid generating financial paperwork. These specific actions include tricks such as putting your assets in another person’s name or receiving payments under the table to avoid getting a W-2.
Don’t take that strict definition as permission to skip filing. You can still get hit with other charges, such as willful failure to pay tax or file a return. That charge still carries a prison sentence of up to a year as well as stiff fines.
Once the IRS figures out how much you should have paid, don’t try to ignore its attempts to contact you. If you don’t respond to any letters or calls, the IRS can reach into your pockets using these common methods:
- Garnishing wages from your paycheck
- Taking any tax refunds due to you
- Pulling money straight out of your bank accounts
- Placing liens on any property you own, preventing you from selling and damaging your credit score.
If you can’t afford the taxes you owe, you have numerous options that don’t involve fees or jail time.
1. Request an Extension
A tax filing extension gives you more time to put your tax return together but does not change your payment deadline. Even if you don’t know the exact amount you owe, you must still pay by the tax filing deadline (usually April 15 — July 15 for 2019 returns) whether you complete your return before or after that date. You must estimate what you owe, paying on time and getting a refund if you overpay. While the extension buys you up to six months, interest still builds up on any unpaid amount while you’re waiting to file.
2. Explain Extenuating Circumstances
If you’ve had an abnormally challenging year, the best move is to call the IRS office at 800-829-1040 and explain your situation. The experience is humbling, but you’re not the first person to need to make the call, and you won’t be the last. If you filed or paid late for a good reason, such as hospitalization or natural disaster, you can write a letter or file Form 843 to ask the IRS to waive penalties. You might be surprised how understanding the IRS can be when you’ve faced a tough situation.
3. Pay Using Installment Plans
If you can’t afford to pay your taxes, the IRS has several options to help you pay without landing you in hot water or charging excessive fees. Contact the IRS as soon as you know you can’t pay, before the deadline if possible. An automated process triggers the fees and penalties starting after the tax deadline, so alerting the IRS early can help you avoid getting caught by the computers.
The most common help the IRS lends is the installment plan. This IRS tax payment plan comes with a fee, but the fee is lower if you request your installment plan online rather than over the phone or on paper. Generally, if the debt is small (less than $10,000) and you’ve been good otherwise about filing and paying your taxes in recent years, the IRS automatically accepts your installment plan.
4. Ask for an Offer in Compromise
What about those commercials that show people who’ve settled a whopping debt for pennies? That’s called an offer in compromise (OIC). You’re basically telling the IRS, “Here’s all I have. Will you take it and forgive the rest?” Unfortunately, these plans can be tricky to negotiate, so you may need to hire an accountant or tax attorney. Furthermore, applying for an OIC comes with a nonrefundable $186 application fee.
For the OIC, you can offer the IRS either a single lump-sum payment or a payment plan for up to 24 months. Either way, the total comes to less than your original tax owed. When applying for a lump-sum compromise, you must submit at least 20% of the tax debt upfront. And when you send the IRS money as your part of the offer in compromise, it is allowed to accept the money and reject the compromise. It can choose to apply what you pay toward your debt and continue collection efforts on the remainder.
Hopefully, you never need to seriously consider delaying your payment or not filing. But if you’re unable to make your tax payments by the deadline, call to inform the IRS. Being proactive about your situation can prevent fees, penalties, and interest from snowballing the original debt and causing bigger headaches down the line.
Have you faced overdue tax trouble? How long did it take you to resolve the problem?
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