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Tax Guy: What to do if you can’t pay your taxes

Five ways to deal if you don’t have enough money to pay your taxes. Read More...

As the filing deadline for last year’s 1040 looms ominously, you have two rational choices: Ship your 2018 return off by the April 15 deadline or get a filing extension by that date. This advice holds true even if you know you don’t owe any taxes — more so if you do but realize you can’t pay up on time.

‘But I know I don’t owe’

Let’s say you are certain there are no additional federal income taxes due for last year. Maybe you had negative taxable income or coughed up your share via withholding or estimated payments. Now you are missing some records; are too darned busy at work; or have some other convincing (to you) reason for putting off filing. And you don’t want to bother with getting an extension either. No problem, since you don’t owe — right? Wrong.

While it’s true there will be no IRS interest or penalties (these are based on your unpaid liability, which you say is zero), blowing off filing or extending is still a bad idea. Here’s why.

  • You may be due a refund. Filing a return gets your money back. No return, no refund.
  • Until a return is filed, the three-year statute-of-limitations period for the commencement of an IRS audit never gets started. The IRS could then audit your 2018 tax situation five years (or more) from now and hit you with a tax bill plus interest and penalties. By then, you may not be able to prove you actually owed nothing. In contrast, when you do the smart thing and file a 2018 return showing zero tax due, the government must generally begin any audit within three years. Once the three-year window closes, your 2018 tax year is generally water under the bridge, even if the return had some warts. (We hope that was enough mixed metaphors for you.)
  • If you had a tax loss in 2018, you can carry it forward to future tax years and use it to offset income in those years. However, until you file a 2018 return, your tax loss for that year doesn’t officially exist.
  • There are other more esoteric reasons that apply to taxpayers in specific situations.

The bottom line is, you need to either file by April 15 or, perhaps more realistically, get an extension and file later when you have more time.

The IRS will automatically approve any request for a six-month filing extension to Oct. 15. Simply file Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Income Tax Return) by April 15. Completing it takes about two minutes. (Honestly.)

You don’t need to have a reason for asking for the extension, and signatures are not required. For example, if your spouse is vacationing in Greece or unavailable to sign for any reason, that’s no problem. The only requirement is the total 2018 income tax liability and any amount still owing (which could be zero) must be estimated with reasonable accuracy on Form 4868.

‘I owe but I don’t have the dough’

This is absolutely no excuse for not filing or failing to get an extension. Here’s why.

  • If you file by April 15 but can’t pay, you should arrange for an installment agreement, as explained below.
  • If you are not ready to file, just send in Form 4868 on or before the magic date.

Either way, you’ll successfully dodge the expensive (and totally unnecessary) 5% a month “failure-to-file” penalty — even though you didn’t pay on time. The only cost for taking this action is an IRS interest charge at a relatively reasonable rate (currently 1% a month, which equates to 12% annual rate) until you pay up. (The interest rate can change quarterly, so it may be higher or lower by the time you read this.)

If you go the extension route, you must close the deal by filing your return no later than Oct. 15. If you know right now you still won’t have gathered together what you owe, relax. You can still arrange for installment payments when you file.

If you fail to file or extend, the IRS will be delighted. You’ll be charged the failure-to-file penalty until it hits 25% of what you owe. For example, if your unpaid balance on April 15 is $10,000, you’ll rack up monthly failure-to-file penalties of $500 until you “max out” at $2,500. After that, you’ll be charged interest until you settle your account (as mentioned, the current monthly rate is 1%).

Save your bacon with an installment agreement

You get the idea on why filing or extending is crucial. But you ask: When do I have to come up with the balance due? The general answer is as soon as possible, so you can halt the IRS interest charges. If you can borrow at a reasonable rate, do it and pay off the government by April 18 when you file or extend.

Alternatively, you can usually arrange to borrow from the IRS by requesting permission to make installment payments on your tax bill. Do this by filing Form 9465 (Installment Agreement Request) with your 2018 return — either on April 15 or by Oct. 15 if you extend.

Form 9465 is pretty simple. (Really.) You suggest your own terms. For example, if you owe $4,000, you might offer to pay $200 on the first of each month. Approval is generally automatic if you owe $10,000 or less (not counting interest and penalties) and propose a repayment period of 36 months or less. You are supposed to get an official answer within 30 days of filing Form 9465, but it sometimes takes a bit longer. (After all, this is the government.) On approval, you’ll be charged a $31 “user fee” if you apply online and agree to have payments automatically debited from your bank account.

For higher amounts or longer repayment periods, the IRS may require some financial information, but the agency has generally been quite reasonable in these circumstances.

As long as you have an unpaid balance under the installment agreement, you’ll be charged interest (at 0.25% a month), which is probably much, much lower than what you would pay to a commercial lender.

Warning: When you enter into an installment agreement, you must pledge to stay current on your future taxes. The government is willing to help with your 2018 unpaid liability, but it won’t agree to defer payments for later years while you’re still paying the 2018 tab. For example, if you are still paying off your 2016 tax bill, forget about an installment deal for 2018.

Paying with a credit card

As you probably know, you can pay your tax bill with Visa, Mastercard, Discover or American Express. But before you pursue this option, make sure to ask what kind of one-time fee your credit card company will charge and the interest rate. You may find the IRS installment payment program is a better deal.

Short-term solution

Maybe the reason you can’t pay is strictly because of a short-term cash crunch. If that’s your story, file by April 18 and pay what you can. The IRS will bill you for the balance. That should take at least 30 days. Then pay when you get the notice. You’ll be charged interest. But that always happens when you defer payments, except with those amazing deals on furniture.

This story was updated on Feb. 6, 2019.

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