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Avoiding Federal Tax Penalties if You Cannot Pay in Full

By June 12, 2019November 23rd, 2020No Comments

With the federal tax due date approaches, some people may worry about being able to pay their tax bill on time. Several options are available, each with benefits and drawbacks. Any taxpayer who worries about covering their bill should carefully consider each of these options. Nobody should skip filing their tax return by the due date. The penalties for failing to file a return on time can be far worse than for failing to pay in full, and it could cut you off from some of the following options for payment extensions in the future.

Request a Payment Extension

Federal tax law permits extensions of time for an individual to pay income tax. The IRS has decided to allow this when a taxpayer can demonstrate that they will experience “undue hardship” if required to pay in full right away. They may request an extension by filing IRS Form 1127.

The IRS states in the instructions for this form that “‘undue hardship’ means more than an inconvenience.” The taxpayer “must show [they] will have a substantial financial loss (such as selling property at a sacrifice price).” This requires submitting substantial information on assets, liabilities, income, and expenses.

This type of extension should not be confused with IRS Form 4868, which only gives a person extra time to file their return. They must still pay the estimated amount of tax owed when they file the form by the April tax deadline.

Request a Payment Plan from the IRS

The IRS allows taxpayers to pay their tax bill according to a defined payment plan. Both short- and long-term plans are available. A short-term plan requires full payment of all taxes, penalties, and interest within 120 days. It is available to taxpayers who owe less than $100,000 in total and does not involve any setup fee.

Two types of long-term payment plans, defined as plans lasting longer than 120 days, are available to taxpayers with no more than $50,000 in combined unpaid tax, penalties, and interest:
– A plan involving automatic debits from a checking account requires payment of a $107 setup fee, or $31 for an online application. Taxpayers who qualify as “low income” may have the fee waived.
– A plan without auto-debiting requires a $225 setup fee, $149 online setup fee, or $43 for low-income taxpayers.

The IRS defines “low income” in this context as having adjusted gross income of at most 250 percent of the federal poverty level.

Pay by Credit Card

The IRS accepts credit card payments through several third-party companies. These companies charge processing fees on top of the tax bill itself, which are typically less than two percent. The IRS notes that these fees may be tax-deductible.

Borrow Money

The IRS is far more interested in getting paid than in where the taxpayer gets the money, and it does not care if people go into debt in order to pay their bill. If a taxpayer cannot get the money from friends and family, they can try taking out a loan. Banks, credit unions, and other lenders offer a variety of loan options. A personal loan can be much less expensive than credit card debt, but access to such loans may vary from one person to another.

Don’t Let Fear Overtake You

What are your options if you can’t pay your taxes in full? We’ve covered a few above, but the one that you should definitely NOT consider is avoiding the situation altogether. As mentioned, failing to file a tax return will not help you in any way whatsoever. The IRS will pursue your return and you will need to file it for many legal and financial reasons. The worst thing you can do is set in motion a situation in which the IRS has to chase you, as that’s only going to lead to more immediate ramifications.

Instead, if you work with experienced and knowledgeable tax professionals, you have more options if you can’t pay your taxes in full. The best part about working with someone who understands these situations is that you’re getting out in front of it with the IRS, and doing so will provide you with more control of the situation in general. The IRS will work with taxpayers who have legitimate problems or who have made honest mistakes, as their bottom line is that they want to get paid much like any other creditor.

Therefore, if you feel as though there are no answers to the question, “What are my options if I can’t pay my taxes in full?,” you need to know that there is at least one answer – reach out for professional help. Firms like Enterprise Consultants Group have years of experience in working with the IRS and other tax authorities, and we’re sure that after talking with us you’ll feel better about your situation.

The tax advisors at Enterprise Consultants Group are available to answer your questions about taxes. Please contact us online or at (800) 575-9284 today to discuss your case.

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