A reader wants to know what to do if you owe taxes and cannot pay.

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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.”

Do you owe a lot to the IRS and fear you won’t get caught up? Take a look at our solutions.

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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 Education Center’s 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.

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About the Author

Howard Dvorkin, CPA

Howard Dvorkin, CPA

I’m a certified public accountant who has authored two books on getting out of debt, Credit Hell and Power Up, and I am one of the personal finance experts for Debt.com. I have focused my professional endeavors in the consumer finance, technology, media and real estate industries creating not only Debt.com, but also Financial Apps and Start Fresh Today, among others. My personal finance advice has been included in countless articles, and has appeared in the New York Times, the Washington Post, Forbes and Entrepreneur as well as virtually every national and local newspaper in the country. Everyone should have a reason for living that’s bigger than themselves, and besides my family, mine is this: Teaching Americans how to live happily within their means. To me, money is not the root of all evil. Poor money management is. Money cannot buy happiness, but going into debt always buys misery. That’s why I launched Debt.com. I’m glad you’re here.

Published by Debt.com, LLC