I have unpaid taxes — Should I Still File This Year?
Filing your taxes and paying them on time is vital. However, people’s life situations sometimes change suddenly, or a one-time event disrupts their entire financial plans for the year. And if any of those result in unpaid taxes, you may be wondering if you should file your tax returns at all.
Tax law is pretty clear on this — it’s crucial to understand that, even if you can’t make the necessary payments by Tax Day, you must still file your tax return or at least try to get a six-month extension. After that, you can review all the options for dealing with your unpaid taxes.
What If I Can’t Pay My Unpaid Taxes?
If you file your tax return, but you can’t pay the owed sum by the due date, know that you’ll immediately start accruing interest and other penalties on your outstanding amount.
Also, bear in mind that filing for a tax-filing extension through Form 4868 doesn’t delay your due date for payment — it only gives you more time to file the necessary paperwork. However, there are some things you can do if you can’t pay the IRS on time.
Asking for a Payment Extension
Filing your tax returns on time (even if you can’t make the payment) minimizes your interest and penalty charges assessed by the IRS. For example, the late payment penalty is 0.5% per month, with a maximum of 25% — however, the penalty for late filing is 5% per month, with the same maximum.
So, even if you can’t pay on time, just filing your tax returns will substantially lower your penalties.
Also, you can file Form 1127 if you believe you couldn’t make payments due to legitimate undue hardship. This may result in a six-month payment extension — but you’ll also have to provide a statement listing all of your assets and liabilities, as well as a detailed itemized statement showcasing all funds you’ve received and spent in the previous three months.
It’s worth pointing out that the IRS doesn’t grant these payment extensions often, and their qualifiers for undue hardship are quite precise. Someone who bought a huge new flat-screen TV and didn’t know they’d owe $3,000 in taxes wouldn’t qualify, for example.
Applying for Installment Agreements
If you believe you’ll need more than a couple of months to settle your tax liability, you could apply for an installment agreement with the IRS. This agreement prevents the IRS from resorting to enforced collection actions in exchange for regular monthly payments to the IRS.
This doesn’t lower your interest or penalties, but the regular payments show the IRS that you’re working towards making good on your tax debts — which is why they don’t resort to more drastic actions.
Borrowing from Yourself
If you’ve got any savings or an emergency fund, now would be a great time to dip into them. Alternatively, if you’re a homeowner with enough equity, you could use a home equity line of credit (HELOC) to borrow from yourself.
HELOC loans come with lower interest rates, at least compared to personal loans and credit cards. But, of course, the biggest downside is the fact that your house is the collateral. And defaulting on a HELOC loan is the same as defaulting on a mortgage — you could potentially lose your house.
Still, this kind of loan turns the lump sum of money you owe to the IRS in taxes into a more manageable monthly payment you make to a mortgage lender.
You could also borrow from your IRA or 401(k). However, seeing as retirement accounts come with tax advantages, withdrawing from them can also trigger a tax liability — such as a 10% penalty for early withdrawal. And it also does damage to your long-term retirement savings plan.
Using a Credit Card
If you use a credit card to settle your tax debt, you’ll have more flexibility and control over your payments. And you may also earn credit card rewards such as miles or points. However, a high credit card balance will lower your credit score, so this is not an option for people who already have unmanageable credit card debt.
Get Help Today for Unpaid Taxes
Taxes can cause you a lot of stress if you are unsure of the best way to deal with paying your taxes. Let our team of tax experts help you with your unpaid taxes. We will help develop the best strategy for your unique circumstances to settle unpaid taxes. Contact our office today to get set on the right path or call us at (616) 458-3994.