Tax time is stressful for many U.S. citizens, prompting them to put off filling out their tax forms. However, regardless of how you feel about the situation, the IRS wants you to file your return — and pay what you owe.
What Happens If You Don’t File Your Tax Return?
First of all, it’s important to understand that “failure to file” is a different situation than “failure to pay.”
If you don’t file your tax return by Tax Day, and you don’t owe anything, you actually don’t have to worry about a penalty. When the government owes you money, they aren’t that fussy. However, if you don’t file your tax return, you miss out on getting any refund you’re entitled to. In fact, after three years pass, you lose the right to receive a refund. So if you haven’t gotten around to filing a previous year’s tax return, and you know you’re due a refund, move forward.
Things get unpleasant when you owe money to the government. The failure-to-file penalty amounts to 5% of your unpaid taxes for each month that your return is late, with a cap of 25% of your unpaid taxes. There’s a minimum fee when you’re 60 days late, too: $135 or 100% of your tax liability, whichever is less.
As you can see, the penalty can add up fast when you don’t file your tax return. You can avoid a failure-to-file penalty if you file for an extension using Form 4868. This gives you until October to file your tax return. However, you need to file it by midnight on Tax Day. So if you suspect you won’t make the deadline, file for an extension ASAP.
However, just because you can buy time on filing your tax return, it doesn’t mean you get extra time to actually pay any taxes that you owe.
What if You Can’t Pay Your Taxes?
Interestingly, the penalties for failing to pay your taxes on time is less expensive than failing to file. In general, you’ll be charged 0.5% of your unpaid taxes each month that you don’t pay, with a cap at 25% of your unpaid bill. You’re also charged interest on your unpaid taxes, amounting to the the federal short-term rate, plus 3%.
So, even if you can’t pay your taxes, you should still file a tax return. That will at least help you avoid the heftier penalty associated with failure to file.
Next, look into an IRS payment plan. The IRS actually offers installment plans you can use to make monthly payments to satisfy your tax debt. You’ll have to pay an origination fee, and interest, but even with those costs, it’s better than falling behind and ignoring your taxes. And, in many cases, setting up an installment plan with the IRS has a lower cost than getting a personal loan or using a credit card to pay off the debt.
Taking care of what you owe is important because if you build up too much tax debt, the IRS can take the following actions:
- Garnish your wages
- Take money from your bank account
- Seize real estate
- Seize your car
- Take future tax refunds
- Revoke your passport
- File charges for tax evasion
Related: What is Tax Evasion?
For most taxpayers, as long as you owe less than $50,000 in combined taxes, penalties and interest, and you’ve filed your returns, you can get a payment plan that allows you to pay over the course of six months or longer. You can even apply for your payment plan online.
Other Loans for Paying Your Taxes
Depending on your situation, you might be able to pay off your taxes using other types of debt. Make sure to run the numbers to see what makes the most sense for you and your situation.
- Personal loan: If you can qualify for a very low-rate personal loan, it might be worth it to pay your taxes immediately. In general, though, you might need to qualify for an interest rate of less than 6% APR to make it worth it. Find the best personal loan with Fiona.
- 0% APR credit card offer: For those who can get a 0% APR introductory purchase rate, using a new credit card can make sense. However, you need to be sure you can pay off the card within the intro period in order to make this an effective strategy for paying your taxes. More on 0% APR credit cards here.
- Home equity loan: You might be able to get a lower rate on a home equity loan or line of credit. However, it’s important to be very careful when using this method. If you end up unable to make payments, you could lose your house. It’s true the IRS can come after your house, but the process usually takes much longer than a foreclosure proceeding. Learn More: Can You Really Pay Off Your Mortgage Early with a HELOC?
- Borrow from friends or family: You might know people willing to loan you money to pay off your taxes. In these cases, they might charge you lower interest — or no interest at all. Just make sure you can pay your debt and it won’t negatively impact your relationships.
For those with excellent credit, it’s a good idea to explore your options so that you can determine if you might have other options.
IRS Offer in Compromise
Another possibility when you miss the tax deadline and can’t pay your taxes is an Offer in Compromise. This is when you actually offer a lower amount than you owe to settle your tax bill.
You can use an IRS calculator to determine if you’re likely to be successful with an Offer in Compromise.
Tips for Those Who Missed the Tax Deadline
If it’s too late and you’ve already missed the deadline, you should try to take action as soon as possible. Here are some of the things you should do to reduce the costs that can accrue in this situation.
- File your tax return ASAP: If you’ve already missed the deadline, get your tax return filed as soon as you can. It’ll reduce the hefty penalty that comes when you fail to file.
- Pay what you can: Pay as much as possible as quickly as you can. The IRS accepts direct payments.
- Apply for an installment plan: You can qualify for an IRS installment plan even after the deadline. If you can’t pay your total bill, apply for a plan and get started making payments.
- Create a system for next year: By creating a regular system for collecting and organizing documents, you can avoid this problem in the coming year.
There are plenty of tax prep software programs that can help you file your taxes, even after the deadline. Some, including TurboTax, H&R Block, and TaxAct even have free versions if your taxes aren’t too complicated.
It’s not the end of the world if you miss the tax deadline, but it can get pretty expensive, pretty fast if you owe money. Your first priority should be making sure you file your tax return as quickly as possible. Once that’s done, you can start exploring options, including an IRS installment plan, for paying off your tax debt as fast as your situation allows.