A reader wants to know what to do if you owe taxes and cannot pay.
Question: Everyone says the economy is getting better, but my luck isn’t. I got sick, got laid off, have more than $10,000 on six credit cards (including department store cards). I just did my taxes, and I owe another couple thousand. I don’t have it! My uncle says just don’t pay the taxes. He says he hasn’t paid his in years, and nothing’s happened to him. What happens if I don’t pay? Do I have any other options? Because there’s nothing I can do here.
— No way I’m giving you my name
Howard Dvorkin CPA answers…
Owing money is always stressful. Owing money to the IRS easily doubles that stress. The best advice I can give is the simplest: Don’t panic. Don’t make any rash decisions that could haunt you for years to come.
Before I delve into your details, let me say something about your uncle: Don’t listen to him. I’ve been a CPA and a financial counselor for more than 20 years, and I’ve never seen “Don’t pay your taxes” work out for anyone. Eventually, it catches up with you. Don’t believe me? Believe names you know. Actor Wesley Snipes went to prison for tax evasion, while singer Willie Nelson had his assets seized by the IRS.
Here’s what you should do…
1. File your tax return anyway
The penalty for not filing your taxes at all is higher than the penalty for not being able to pay everything you owe at once. Or in IRS lingo, “The failure-to-file penalty is generally more than the failure-to-pay penalty.”
Adds the agency: “The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes.”
2. Pay what you can
Believe it or not, the IRS will work with you. It has payment plans and “installment agreements” for almost every stressful situation, including individuals who owe up to $50,000 and small businesses that owe less than $25,000. Learn more on this section of the IRS website.
3. Borrow to pay the IRS
I almost never endorse this, and I only do so in this one instance…
“Consider obtaining a loan or paying by credit card,” the IRS says. “The interest rate and fees charged by a bank or credit card company may be lower than interest and penalties imposed by the Internal Revenue Code.”
Of course, adding to credit card debt isn’t advisable, and it can hurt your credit score. Then again, so can back taxes. Here’s what Transunion, one the three credit bureaus, says on the topic…
They say that the only thing you can count on in life is death and taxes, but you’d better add “bad credit” to the list if you neglect to pay what you owe Uncle Sam. The IRS takes a hard line with back taxes and could even put a lien on your home or garnish your wages to get what they’re due. This shows up in your credit history, so make sure you’re all caught up or at least using a payment plan to settle.
I once warned a reader against borrowing against her 401(k) and her husband’s life insurance policy, but that was to pay off credit card debt. When it comes to the IRS, the rules are different.
A conclusion and a warning
As you can tell, I’m very serious about tax questions. It’s difficult to give really specific advice, because so much depends on your particulars.
However, I urge you to take to heart this final piece of advice: If you get into trouble with your taxes, consult our Tax Debt section. It’s free and offers much more advice than I can delve into here. If you’re worried about your situation, call 1-888-470-4531 for a free analysis with a tax debt expert.
Just don’t do this: nothing. Because it will cost you.
Have a debt question?
Email your question to email@example.com and Howard Dvorkin will review it. Dvorkin is a CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.