What to do if you can't pay your taxes

Apr 8, 2014

by Jonathan Medows, CPAforfreelancers.com

The corporate tax filing date of March 17 has already passed, and the April 15 date for individual returns is closing in fast. Have you filed your return – or are you on track to do so?

The Internal Revenue Service does not look kindly on those who don’t file tax returns and don’t pay the taxes they owe. In fact, if your freelance business is organized as an S-corporation and you didn’t meet the March deadline, you and every other shareholder are now on the hook for a “failure-to-file” penalty of $195 a month for 12 months, or until your return is filed. And that’s even if, like most corporate pass-through entities, your S-corp doesn’t owe a dime in taxes.

If you don’t pay the money you owe, you’ll face a “failure-to-pay” penalty of 0.5% of the unpaid taxes, assessed on a monthly basis, up to a maximum of 25% of the total. More information on penalties is available here: http://www.irs.gov/uac/Failure-to-File-or-Pay-Penalties:-Eight-Facts.

But what if you brought in more income than expected in 2013 and did not bank enough money to cover the additional taxes?

Or what if your early 2014 expenses have been greater than expected and eaten up the cash you had set aside for taxes? Don’t despair – and definitely do not bury your head in the sand and hope your troubles will go away. Your best bet is to file for an extension for your return and pay as much of your tax liability as you can now. If you get an extension and you can pay at least 90 percent of your actual tax liability by April 15, you won’t face the failure-to-file penalty and you’ll have until the extended due date of Oct. 15 to pay the remaining balance and file your return.

What if you can’t pay anything right now?

It is possible to charge your taxes to a major credit card. The IRS has information on which cards can be used and what fees apply here: http://www.irs.gov/uac/Pay-Taxes-by-Credit-or-Debit-Card. This is not a good option if you can’t pay off your credit card bill quickly, because of course you’ll rack up hefty interest on the balance. But if you’re temporarily short on cash and expect a customer payment that will allow you to pay off your credit card debt quickly, it’s an option.

If you’re in longer-term trouble with your freelance income, the IRS does offer some limited installment plans that allow you to make monthly payments on your taxes owed. You’ll have to apply for the program and pay a fee to set up the plan if your application is approved. It’s best to set up the plan so that you can pay off your tax debt within the year. And if you set up the payments as automatic debits from your bank account, you’ll be less likely to miss a payment, and you’ll pay a lower up-front fee.

Be aware that if you get approved for an installment plan, there will be interest charged on the balance you owe. The good news is that the rates are relatively modest – likely much less than what you’ll pay on a credit card balance.

This website includes more information on installment plans and a link to an online application if you owe $50,000 or less and you’re up-to-date with filing your tax returns, http://www.irs.gov/Individuals/Payment-Plans,-Installment-Agreements.

What if you’re in even worse trouble and owe the IRS several years of back taxes?

The IRS has a plan called the Offer in Compromise, http://www.irs.gov/Individuals/Offer-in-Compromise-1, which allows you to negotiate and settle your tax debt for less than you owe.

You can submit an offer yourself online, but it’s always best to have a professional represent you when you are negotiating with the IRS. You’ll have to submit documentation that proves you cannot pay what you owe and the compromise amount is the most that the tax authorities are likely to get from you over a set period of time.

If you meet certain low-income qualifications, you won’t have to pay a fee to have your offer considered or be required to start making payments immediately. It’s painful to enter into such a negotiation, and it may hit your pocketbook hard, but in the long run working out your debt and avoiding an aggressive action like a tax lien will be worth it.

Jonathan Medows is a New York City based CPA who specializes in taxes and business issues for freelancers across the country. He has a resource section with how-to articles specifically for the self-employed at his website, http://www.cpaforfreelancers.com.