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What If I Can't Pay My Tax Bill? 6 Tips for Filers Who Owe Too Much

Can't afford to pay your tax bill?
Cassandra Hubbart, DailyFinance
(Updated April 3, 2013)

Many taxpayers charge blindly into tax season, not knowing whether they'll wind up receiving a refund or owing Uncle Sam. If you haven't done any tax planning, a large obligation to the government can come as a huge surprise -- in some cases, so much so that taxpayers are unprepared to foot the bill. What do you do if you find that you owe money come tax time but don't have the ability to pay? Here are a few tips.

1. Double check your tax return.

It seems obvious, but doing a quick review of your taxes may lead to deductions or credits that you've overlooked. Some taxpayers remain confused about the Making Work Pay Credit, which was in effect for only two years -- 2009 and 2010. In 2011 and 2012, it was replaced by a reduction in payroll taxes that reduced the share employees paid in Social Security taxes to 4.2% from 6.2%. But filers don't have to report anything on their returns, since they've already received the credit in their paychecks. If you are self-employed, your self-employment tax for 2012 is 10.4%, down from the customary 12.4%.

If you're a college student or a parent of one, you may be eligible for the American Opportunity Tax Credit, which provides a credit of $2,500 to those who earn $80,000 or less ($160,000 for joint filers). The credit was set to expire in 2010 but Congress extended it through the end of 2012.

2. File on time.

Even if you can't possibly pay what you owe immediately, make an effort to file on time anyway. There are penalties associated with failing to file on time, as well as penalties associated with failing to make payments. Don't compound your problems by incurring both.

3. Explore all your options.

Just because you can't write a check for the full amount today, that doesn't mean that you can't make a payment. Don't forget that the IRS will accept payment by credit card (just try to use a low-interest card if you have one -- paying your taxes with plastic is usually a bad idea). You may also be able to borrow from family members -- or take out a home equity loan. If you can finance the taxes you owe from some other source, you may have to pay interest, but you'll escape penalties from the IRS.

4. Consider a payment plan.

The IRS is more than happy to take your money over a period of time -- with accompanying penalties and interest. Painful, sure. But it's better than doing nothing. And the interest rate is actually quite low: a mere 3%. If you owe $25,000 or less in combined tax, penalties and interest, you can enter into an agreement using the IRS' online tool: the Online Payment Agreement. If you prefer to file through the mail, you can complete a federal Form 9465, Request for Installment Agreement. If you owe more than $25,000, you can't file for an agreement online: You'll have to submit the Form 9465 and a financial statement known as a federal Form 433-F.

5. Ask for a temporary delay.

If you have a significant financial issue that makes it impossible for you to pay your taxes now, the IRS may temporarily delay collection until your financial condition improves. This option is strictly up to the IRS -- they determine whether your condition warrants a delay. Penalties and interest will still accrue during this time, and they could put a lien on your property. However, it will give you some breathing room while you get your affairs in order.

6. Consider an Offer in Compromise.

If all else fails, you can consider an Offer in Compromise. An OIC is an agreement between you and the IRS that allows you to pay less than the full amount owed. You should be aware that the IRS has strict criteria for accepting an OIC, and there are associated costs (including a filing fee). You may want to consider retaining a tax professional to help you. Just be aware, however, that despite ads on TV claiming that your account can be settled for "pennies on the dollar," the IRS rejects most OIC applications, especially if they believe they can otherwise collect from you.

No matter which option you choose, don't ignore your tax obligations. They won't go away and will likely get worse, resulting in tax liens on your property or garnishment of wages. And keep in mind that the IRS is a great deal more cooperative when they believe you're making an effort to resolve things on your end.

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going off the grid and becoming a hobo has never looked better.....most people can't afford to live in this country anymore

April 05 2013 at 1:53 PM Report abuse -1 rate up rate down Reply

Its about to get much, much worse in 2013 - under Obama.

"President Mitt Romney"

What a relief! Sounds wonderful!

April 19 2012 at 12:31 AM Report abuse rate up rate down Reply

8, getting rid of incompetent federal agencies like the IRS terrorists and that agency that was supposed to be a watchdog over waste of tax dollars (the one that was in the news for expenses in Las Vegas)! That thug who in addition to getting a, I believe, $9000 bonus, is still getting his $179,000 salary even though he is supposed to be on suspension! I am so sick of the waste and fraud that goes on in this glorified organized crime (aka federal government)! And these so-called lousy options if one cannot pay all of the taxes is not only utterly insulting to the working class but an absolute scam especially that fraudulent "offer in compromise" which only worsen things for me! And to use a credit card is also insulting considering most americans have dug themselves into infinite credit debt already ! Not to mention the enormous finance charges and interest rates! This is just a way to erode the middle class even more! What we REALLY need is real tax reform starting with the removal of these IRS thugs and its commissioner who I am sure is making a 6 figure salary off our backs and giving us amnesty and make those rich thugs and their derivative earnings (as opposed to real earnings) give up that money! It makes absolutely no sense to keep going after the same group of people with the least in assets and resources when all you federal thugs including congress need to do is simply stop the tax loop holes, get rid of these antiquated tax codes and stop this sensless waste like corrupt federal agencies and starting wars we cannot finished!

April 17 2012 at 1:42 AM Report abuse -1 rate up rate down Reply

you must pay your taxes at any cost, millions who won't work depend on you

April 16 2012 at 3:45 PM Report abuse +1 rate up rate down Reply

Go back to HS and get your GED if you are truly that stupid.

April 16 2012 at 3:17 PM Report abuse rate up rate down Reply

Wow! I can't believe they made such a glaring mistake by referencing the "Making Working Pay Credit" (1040, Line 63, on 2010 Tax Return, with Schedule M) which is NO LONGER AVAILABLE for tax year 2011. To be fair, I did notice that the IRS failed to include this change in the "What's New" section (pg. 8) of the 1040 (2011) Instructions booklet. Still, it does strike at the credibility of the entire article particularly coming from reputed "The Tax Center." Daily Finance Staff PLEASE do your homework from now on. There's enough confusion out there about taxes as it is.

April 16 2012 at 1:12 PM Report abuse -1 rate up rate down Reply

Cant pay your taxes..........head for the border.

April 16 2012 at 12:35 PM Report abuse rate up rate down Reply

Starting with the TY 2011, another option not mentioned is available which many (not all) can qualify for which can waive the Failure to Pay Penalty. Explore new IRS Form 1127-A. John Masselli, Enrolled Agent. Licensed and Enrolled by the U.S. Treasury to practice before the Internal Revenue Service.

April 16 2012 at 10:45 AM Report abuse -1 rate up rate down Reply

Hello. Thanks for the article but I would like to make a correction about the information regarding Offers in Compromise. To the contrary, it is not that difficult to get an OIC. I was an IRS employee for 12 years and I worked as an OIC examiner up until November of last year. I now own my own tax prep and consulting business. The IRS has gone to great lengths to make OICs more available to taxpayers who are having ecomonic hardships and are unable to pay there tax debt. I have seen more offers accepted than rejected. And yes, I have settled several cases for "pennies on the dollar". There is a fee but if your income is below a certain amount the fee is waived. The processed as been streamlined in an effort to cut much of the red tape previously involved with filing OICs. Trust me when I tell you that this is probably the BEST TIME TO FILE AN OFFER if you own tax debt that you cannot pay. Plus, its alot less paper work involved so taxpayers can file there OWN offers without the aid of a tax professional. Go to the IRS website and search Offer in Compromise. OICs are done on Form 656 and can be printed from the IRS web site. Remember offers are accepted or rejected on a case by case basis. The only negative thing I can think of is the time it takes to get an offer processed. This ecomomic climate has caused an avalanche of offers filed within the last few years. There are just not enough people to work them in a timely manner. I hope this helps.

April 16 2012 at 10:09 AM Report abuse -1 rate up rate down Reply

I had expenses related to my application for "resonable accommodation " under the fair housing act . My request was finally accepted by the condo assoication. The contract will allow me to have a golf cart for added mobility thru the community. My expenses included lawyer costs, cart costs, running an electrical line underground to charge the cart and trail fees associated with the use of the golf cart. Are these expenses allowed to be deducted from my income tax.

April 16 2012 at 9:43 AM Report abuse rate up rate down Reply