Didn’t Pay Your Taxes Last Year? Take These Steps ASAP

Woman is holding overdue bills before making online payment.
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If you didn’t pay your taxes last year, there’s still time — but you need to get moving. The IRS typically gives you up to three years to collect any credits and refunds you’re owed. Another reason to hustle is that your tax bill gets bigger every month you delay.

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“If you didn’t pay your taxes last year, one of the most important things to keep in mind is that time is of the essence,” said Armine Alajian, CPA and founder of the Alajian Group. “The longer you wait, the more penalties and interest you may accrue, so it’s important to take action as soon as possible.”

You can’t ignore the IRS forever. If you’re trying to file for 2022 while 2021 is still hanging over your head, follow these steps to get back in good standing.

1. File Right Away Even if You Can’t Pay Your Bill

Even if you don’t have the money to pay what you owe, it’s crucial to file your tax returns as soon as possible.

“If you don’t, then you will face a 5% per month penalty,” said E. Martin Davidoff, partner-in-charge of the National Tax Controversy Practice for Prager Metis, an international advisory and accounting firm with more than 100 partners and more than 600 team members.

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It’s called the Failure to File penalty, and 5% is just the start — it can grow up to 25%.

2. Pay if You Can; Request an Extension if You Can’t

Now that you’ve filed your returns, you’ve stopped the major bleeding. The Failure to Pay penalty is just one-half of one percent, which is 10 times better than the 5% Failure to File penalty.

If you can pay what you owe right away, that’s always the best option. But if you need a few months to drum up the cash, just ask.

“The IRS is empowered to give taxpayers an extension of up to 120 days,” said Wayne Bechtol, senior tax accountant and board advisor at Fiona. “Apply for the extension and pay the penalty of 0.5% per month on the unpaid tax balance.”

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The penalty applies only to the unpaid portion, so pay as much as you can upfront — and never park a tax bill on the back burner. Like the Failure to File penalty, the Failure to Pay penalty can keep growing up to 25%. Also, be aware that 120-day extensions are available only if you owe less than $100,000.

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3. Request a Payment Plan if You Need More Time

If 120 days isn’t enough, contact the IRS and negotiate a long-term payment plan.

“Submit Form 13844 or Form 9465, depending on how you pay the application fee,” said Bechtol.

Application fees range from $31 to $225, depending on whether you apply online, by mail, over the phone or in person. Once that’s out of the way, you’ll stem the damage even further — upon entering into a long-term monthly plan, the 0.5% interest rate is cut in half.

“The IRS allows setting up an installment agreement with an interest rate of 0.25% per month until you pay the tax,” said Bechtol.

Long-term payment plans are only available if you owe less than $50,000.

4. Ask the IRS To Waive Penalties

The IRS can’t spare you from any interest that accrues on your bill, but in some cases, it will waive penalties.

“If last year was the first year you got behind on taxes, the IRS may approve you for first-time abatement,” said Logan Allec, CPA and founder of Choice Tax Relief. “Just call them up and ask for it. The worst that can happen is they say ‘no.'”

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Although the agency can’t waive interest charges, it will drop interest that accrued on penalties it assessed if it agrees to abate those penalties.

“Note that you can get this first-time abatement even if you haven’t paid your taxes from last year yet,” said Allec. “But it’s smart to pay your taxes first and then ask for first-time abatement because the first-time abatement will only abate existing penalties.”

5. If You Can Prove Hardship, Plead for Mercy

Allec outlines three hardship-based resolutions for those who truly can’t afford to pay anything, even in monthly installments. Just don’t expect the IRS to take your word for it. Here are the three possible options.

Currently Not Collectible (CNC) Status

“This means you don’t have to pay anything to the IRS, but they will still likely file a notice of federal tax lien against you,” said Allec. “In order to get into this status, you must prove to the IRS that you have no disposable income to pay your balance. Note that the IRS can remove you from CNC status if they believe you have become collectible again.”

Partial-Payment Installment Agreement (PPIA)

“This is an agreement with the government to pay less than you owe over time,” said Allec. “You must show that the amount you can pay monthly is truly all you can pay. Note that the IRS has the authority to reevaluate PPIAs every two years.”

Offer in Compromise (OIC)

“This is an agreement to settle your tax debt with the government for less than you owe,” said Allec. “You must show that your available monthly income as well as your equity in assets is less than the amount you owe.”

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About the Author

Andrew Lisa has been writing professionally since 2001. An award-winning writer, Andrew was formerly one of the youngest nationally distributed columnists for the largest newspaper syndicate in the country, the Gannett News Service. He worked as the business section editor for amNewYork, the most widely distributed newspaper in Manhattan, and worked as a copy editor for TheStreet.com, a financial publication in the heart of Wall Street's investment community in New York City.
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