I’m a Tax Expert: 5 Things You Must Do If You Don’t Have Money To Cover Your Taxes

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Tax season — which started Jan. 29 — can trigger a lot of emotions. While some Americans may already be planning their next vacation or paying down debt thanks to the refunds they expect to get, others might feel anxiety.

Indeed, a new GOBankingRates survey found that a whopping 13% of Americans say they are worried they won’t have enough money to cover their taxes.

Yet, experts argued that if that’s the case, the best path forward is to not panic but to act fast and address the issue head-on.

“Don’t delay. Whatever your situation is, putting action off likely will make matters worse,” said Michael Micheletti, chief communications officer at Unlock. “Resolve to figure out your options as soon as possible. Consulting a tax advisor who can advise on options is a smart step for most people.“

File on Time

As Adam Brewer, tax controversy attorney at AB Tax Law, explained, if you don’t have the money to cover your taxes, you still need to file on time.

“The penalty for filing late is way more painful than the penalty for paying late,” he said.

Indeed, Unlock’s Micheletti explained that the penalty for failing to file a return — or request an extension — is 5% of your owed taxes per month, which is 10 times the penalty for failure to pay, which is 0.5% per month, plus interest on the outstanding taxes that are owed.

“The interest is calculated as the federal short-term rate plus 3% — and it compounds daily,” he said. “So a $5,000 tax bill on a return that was filed on time, but paid three months late, would result in a $75 late-payment penalty plus interest. That same tax bill — with an unfiled return — would result in a $750 penalty plus interest.”

For most taxpayers, the deadline to file their federal tax return, pay any tax owed or request an extension to file is Monday, April 15, 2024, according to the Internal Revenue Service (IRS). Taxpayers living in Maine or Massachusetts have until April 17, 2024, due to Patriot’s Day and Emancipation Day, and taxpayers residing in a federally declared disaster area have additional time to file.

Understand Extensions

If you can’t file on time, you can request a six-month extension until Oct. 15 this year, Micheletti said.

Yet, you need to be aware that getting an extension to file doesn’t grant you an extension on payment and you’ll still owe a monthly failure-to-pay penalty if you don’t pay.

“Occasionally, however, the IRS exempts taxpayers from penalties for reasonable cause,” he said. “Some reasonable causes include death in the family, natural disaster, divorce, active military duty or severe illness.”

Look At Installment Plans

An installment plan would allow you to pay off an outstanding balance over time and you can request it online.

Once your online application is complete, you’ll receive immediate notification of whether your payment plan has been approved without having to call or write to the IRS, according to the agency. The plans include short-term and long-term plans.

Short-term payment plans have a 120-day period or less and the total amount owed is less than $100,000 in combined tax, penalties and interest.

“You would still owe interest on the unpaid balance, and a failure-to-pay penalty of 0.5% per month, up to a maximum of 25%,” said Mark A. Luscombe, JD, LL.M, CPA, principal analyst, Wolters Kluwer Tax and Accounting Division North America.

As for long-term payment plans, the payment period is longer than 120 days, paid in monthly payments, and the amount owed is less than $50,000 in combined tax, penalties and interest, according to the IRS.

“If you think that you could come up with the money to pay the tax in a short period of time, you could consider making the payment with a credit card if you can pay off the credit card balance before significant interest charges are incurred,” Luscombe said.

Look At Offers in Compromise

If you do not believe that you will have the resources to pay the tax balance due, you may request an Offer in Compromise from the IRS, Luscombe said, noting that this can result in a reduction of the amount you owe to the IRS.

“The IRS will review the information submitted to evaluate income, expenses and ability to pay,” he added.

Not surprisingly, the criteria are stringent and the IRS only approves around one-third of Offer in Compromises requested, Luscombe said.

Make Changes

Finally, experts argued that you should try to figure out what went wrong so it doesn’t happen again for 2024.

“Too many people that owe money for taxes wait until October to file and don’t make any changes for the current tax year,” said AB Tax Law‘s Brewer. “If you owe for 2023, then you will probably owe for 2024 if you don’t make a change. Figure out what went wrong, then either adjust your withholding or make estimated tax payments so you aren’t stuck with another tax bill this time next year.”

And whatever you do, don’t ignore a tax bill and take the steps you need to reduce the burden of payments instead.

“The IRS has broad authority to collect on tax debt through bank levies and wage garnishment, so ignoring the bill could add a much greater burden to your day-to-day finances than a payment plan might,” said Dana Miranda, author of the Healthy Rich newsletter.

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