“Should I File My Taxes Even if I Can’t Pay?”

When you do your taxes for 2018 and learn that you owe the IRS, you’ll probably be annoyed. If you can’t pay what you owe, annoyance can escalate into alarm. In this situation, it’s tempting to skip filing altogether. What’s the point if you can’t pay? Won’t a filing without an accompanying payment set the IRS on your trail because it now knows that you owe money?

The bad news is that it’s true. The IRS will see that you owe taxes and contact you about payment. You will also incur late-payment penalties. The good news is that by filing your tax return anyway, you will escape the failure-to-file penalty, which can be much higher.

Late Penalties Explained

If you owe taxes and don’t file, you can be hit with two IRS penalties:

  • Failure to file, which is equal to 5% of the amount owed for each month (or fraction thereof) that the taxes remain overdue, up to a maximum of 25% of the total bill. So if you file a week late and owe $2,000 in taxes, you could be subject to a $100 penalty. If you’re even one day more than 60 days late, the penalty is $210 or 100% of the amount owed, whichever is less.
  • Failure to pay, which amounts to 0.5% of your unpaid taxes for each month or part of a month that the bill remains unpaid, up to 25% of the total owed.

If you can’t afford to pay but still file, you will only face the failure-to-pay penalty. However, if you anticipate being able to cover your tax bill soon after the filing deadline, you can request an extension to file. If you pay at least 90% of what you owe, you may not face any penalties as long as the remaining 10% is paid by the extension deadline.

Minimize the Financial Impact

This overview demonstrates how important it is to file your taxes on time, even if you can’t pay the bill at the moment. The failure-to-file penalty is 10 times higher than the failure-to-pay one. If paying will present a financial challenge, you can look into the IRS payment plans that divide the bill into affordable monthly installments and can even reduce the penalties you’re facing.

If you can pay your balance within 120 days, setting up an installment plan won’t cost you anything. Otherwise, as of 2019, a direct debit agreement will cost $31 if you set it up online and $107 if you set it up by phone or mail and the fee for a direct debit agreement (from your payroll or bank) will be $149 online and $225 by phone. Lower-income taxpayers can apply to have the fee reduced.

Below is some general information about payment amounts, which tend to be geared towards how much you owe.

  • Less than $10,000: As long as you agree to pay off the total within three years, the IRS will not ask about your finances.
  • $10,000 to $25,000: Balances in this range qualify for a streamlined installment plan, which gives you 72 months to pay. There is a minimum payment equal to the balance due divided by 72.
  • $25,000 to $50,000: Minimum payment will be the balance divided by 72, but with a higher tax bill, you will have to submit additional information about your income and expenses
  • $50,000 to $100,000: Minimum payment will be the balance divided by 84. You will not have to disclose your financial information if you agree to a direct-debit agreement.
  • Over $100,000: If you owe over $100,000 in taxes, the IRS will want to know more about your income, assets, and investments. In this situation, the minimum payment will be unique to your agreement with the IRS.

If you are struggling with back taxes and accumulating penalties, contact Boeshaar Law. We have significant experience negotiating with the IRS on behalf of our clients and have succeeded in having penalties abated if there were extenuating circumstances, such as a death in the family or loss due to fire and other disasters. To review your options with a dedicated tax attorney, call (206) 899-4860.

Written by Robert V. Boeshaar

Robert V. Boeshaar

Robert V. Boeshaar is a Seattle tax attorney committed to helping individuals and small businesses who are facing problems with the IRS. He believes in using his experience to serve others and to make a difference in their lives.