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What comes to mind first when you’re ready to file your income taxes and see a number in the Amount You Owe field that’s larger than your bank account balance?
Two groups of taxpayers are the most likely to owe money to the IRS on tax day (April 18 in 2023): self-employed individuals who didn’t make estimated tax payments (or didn’t pay enough), and W-2 employees who didn’t have enough withheld from their paychecks. Both problems can be fixed for the following year, but what do you do when you can’t pay your tax bill by the April deadline?
Once the initial shock wears off, you might try to secure a loan from family or friends. Another option, though it’s not a great choice in these days of rising interest rates, is to put it on a credit card. You might also apply for a loan.
Or, you can ask the IRS for help. The agency has multiple programs in place to help taxpayers fulfill their obligations, though you may end up having to pay additional fees, penalties, and interest.
We’re here to break all of these scenarios down for you.
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Where Can You Get a Loan to Pay Your Taxes?
If your relatives don’t come through and you want to either pay on time or file an extension with a payment and you left yourself some time to try to acquire a loan, there are several places you can look.
Bankrate.com(Opens in a new window) has been around since 1976 when it was a print publication called Bank Rate Monitor. It’s a great resource for comparing rates for financial products like credit cards, CD rates, home equity loans, and personal loans. The site also offers related editorial content, reviews, and financial calculators.
Lendio(Opens in a new window) is geared toward small business needs and has a network of more than 75 lenders. The service claims you can complete your application in roughly 15 minutes and get funding in as little as 24 hours.
QuickBridge(Opens in a new window), too, offers fast loans, but it says funding occurs in a matter of days. Application only requires a driver’s license and bank statement.
OnDeck(Opens in a new window) offers possible same-day funding in some states on loans of up to $100,000. It offers two options: term loans and lines of credit.
Fundbox(Opens in a new window) offers small businesses a revolving line of credit that can be approved in as little as three minutes. Funds may be available as soon as the next day if approved.
What Payment Plan Options Does the IRS Have for Taxes?
Getting a loan from a financial institution may be your best way to keep things simple. If you prefer not to go that route, you can apply for one of the two plans the IRS offers that allow you to pay over time.
Short-Term Payment Plan
The Short-Term Payment Plan is an option if you can pay the amount you owe in 180 days or less. You still accrue penalties and interest (more on that later) until the total amount is paid. You can apply online if you owe less than $100,000 in combined tax, penalties, and interest. This plan is only available to individuals, including sole proprietors and independent contractors.
Long-Term Payment Plan (Installment Agreement)
You can apply online for the Long-Term Payment Plan (Installment Agreement) if you are an individual owing $50,000 or less in combined tax, penalties, and interest, or a business that owes less than $25,000.
You’ll find more details and links to online application pages for both plans on the IRS’s online payment agreement page(Opens in a new window). This IRS system is only available during specific hours. If you’re not eligible to apply online, you may still be eligible to pay in installments by completing Form 9465(Opens in a new window) and mailing it in. You can also apply by phone. Individuals should call 800-829-1040. Businesses can call 800-829-4933. You can also call the phone number on your bill or notice.
How to File for a Tax Extension and Make a Partial or Estimated Payment
If you’ve secured funding for at least part of what you think you will owe but you won’t have your return ready in time, you can ask the IRS for more time by filing an extension. You just have to submit IRS Form 4868(Opens in a new window) by April 18, 2023. The hitch? The IRS still expects you to include all or part of what you think you’ll owe, so you still have to find a funding source. With the extension, you have until October 16, 2023, to complete and submit your tax return. You can print and mail the form with your payment or use personal tax preparation software.
You can also submit your payment electronically in three ways, which indicates you’re filing for an extension. The first is the IRS’s Direct Pay With Bank Account(Opens in a new window) service. If you choose this option, you don’t have to file Form 4868 and you get a confirmation number. Second is the Electronic Federal Tax Payment System(Opens in a new window), which further safeguards any payments you make because it requires three forms of identification. Lastly, the IRS also uses third-party payment processors(Opens in a new window) for taxpayers who want to put their payment on a debit or credit card or select digital wallets like PayPal. This method comes with additional processing fees.
What Kind of Penalties Does the IRS Impose If You Don’t Pay Taxes?
There’s a long list of penalties(Opens in a new window) the IRS can assess, depending on how the taxpayer has erred. The agency sends out notices (letters) about them. Two you should know about are Failure to Pay and Failure to File.
Failure to Pay(Opens in a new window) is the less serious of the two. If you file but do not pay your taxes, you will pay a penalty calculated by the IRS based on how long your overdue taxes remain unpaid. You’ll be assessed 0.5% of the total of your unpaid taxes for each month or partial month until the debt is paid. This penalty cannot exceed 25% of your total unpaid taxes. There is also a penalty if the IRS learns you owe more than you claimed.
Failure to File(Opens in a new window) is a penalty with a much heftier fine: 5% of your unpaid taxes every month or part of a month your return is late. It, too, can’t exceed 25% of the total of your unpaid taxes.
The IRS also charges interest(Opens in a new window) on penalties, as it does for underpayment of taxes, even if you file an extension.
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You may be able to have penalties reduced or removed if you “acted with reasonable cause and in good faith.” The Penalty Relief for Reasonable Cause(Opens in a new window) program accepts or rejects taxpayers on a case-by-case basis after considering all the facts presented. Some examples of valid reasons for not filing or paying on time include:
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Fires, other natural disasters, or civil disturbances
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Serious illness or death
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Inability to obtain records
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An electronic filing or payment that was delayed by system issues
You can apply for this relief over the phone by calling the number in the upper right corner of your notice. Or you can submit Form 843(Opens in a new window).
Can You Negotiate With the IRS on Taxes?
There is an option that allows you to pay less than you owe. You can request an Offer in Compromise(Opens in a new window) if you’re unable to pay your tax liability or if “doing so creates a financial hardship.” The IRS generally approves requests when you make an offer that is the most the IRS could expect to collect from you within a reasonable time. The agency suggests you explore all other possibilities before attempting an Offer in Compromise.
The IRS considers four things before deciding: your ability to pay, income, expenses, and asset equity. You are eligible to apply for the program if you:
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Have filed all of the required tax returns and submitted all quarterly estimated payments
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Are not in the process of declaring bankruptcy
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Filed a valid extension for the current year (unless you’re applying for a different year)
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Are an employer who has submitted tax deposits for the current quarter and the past two quarters
You can complete the Offer In Compromise Pre-Qualifier here(Opens in a new window). More information and the required forms are available here(Opens in a new window). If your offer is rejected, you can appeal the ruling(Opens in a new window).
What Happens If You Simply Don’t Pay Your Taxes?
You probably already know the answer to this one. If you don’t pay your taxes, first you receive notices about penalties and interest. Then you may hear from a collection agency, and the IRS will eventually start to slap liens on your assets. If you don’t respond, the IRS will eventually attempt to collect by seizing assets like your paycheck, your Social Security payment, your bank accounts, and your property.
The best solution, of course, is to keep up with your taxes during the year. If you’re a W-2 employee and you had to pay a sizable chunk on your 2022 taxes, change your withholding. If you’re self-employed and getting at least some of your income reported on 1099s, use a personal finance application or small business accounting website to track your income and expenses throughout the year, so you can estimate and pay your quarterly taxes.
If you do start getting notices from the IRS about payments due, communicate promptly. There are plenty of options, and the agency work with you as long as you show good faith efforts.
For more tax coverage, see 7 Ways to Start Minimizing Next Year’s Taxes Now.
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