You just finished working on your taxes and now you feel sick to your stomach. Yep, you owe the IRS a lot of money. You might experience denial at first. There must be a mistake. Did I forget some deductions? Then anger. Taxes suck! They’re too high! Then questions flash through your mind. How long do you have to pay if you owe taxes? Can you go to jail for not paying taxes? Can the IRS take your house?
Stop. Take a breath. It’s going to be okay. You’re not going to prison.
If you owe taxes, the worst thing you can do is ignore the problem by not filing a tax return or trying to hide from the IRS. That’ll just rack up more fees and penalties—and the IRS will eventually find you.
But if you face the problem head on, there’s hope. You can dig yourself out of even the deepest tax hole, and we’ll show you how. And we’ll make sure you never end up with tax heartburn again.
What to Do if You Can't Pay Your Taxes
If you can’t pay your taxes, the first thing you need to do is acknowledge you have a problem. In simple terms: You have a tax bill, and you don’t have the money to pay it. Don’t dwell on fear or what ifs. Take it one step at a time.
Step 1: File by the regular deadline, even if you can’t afford to pay your taxes on time.
As soon as possible, begin working with an experienced tax professional to help you file your taxes. They may be able to find credits and deductions that will lower your tax bill. And when you owe the IRS, every dollar counts!
Taxes shouldn’t be this complicated. Connect with a RamseyTrusted tax advisor.
If you owe money to the IRS, you might think it’s best to wait to file your taxes. But the penalty for not filing a return or filing a late return can be 10 times as much as the penalty for not paying on time.
Keep in mind that even if you file your tax return in February or March, your tax bill isn’t due until Tax Day (April 18 this year). So if you wait until the deadline to pay, you could have a couple of months to save or earn some extra money.
You might be wondering if a tax extension will give you more time to pay. It won’t. An extension just gives you more time to file, but your taxes are still due on Tax Day—so if you pay late, you’ll have to pay interest and penalties on any taxes you owe for the year. So make sure you file your return on time!
Step 2: Pay as much as you can by the tax deadline.
When David D. was hit with a $14,000 tax bill, he didn’t have much time to come up with the money.
“My wife and I were expecting our first kid, so we were trying to save up for that,” David said.
David didn’t want to pay penalties and interest for paying his bill late, and he was determined not to be in debt. So, he sold one of his two cars—which was paid for—and used the money to pay his taxes.
Not everyone has the option to sell a car, but you probably have stuff lying around the house you can sell for extra cash. The more you pay on your tax bill, the more you save on penalties and interest.
Now listen, if you find yourself out of work, don’t panic. Forget the tax bill (for now). When the going gets tough, you need to focus on the things you really need to survive. Take care of the Four Walls—food, utilities, shelter and transportation—before you do anything else. Once you’ve put food on the table and kept the lights on, then pay Uncle Sam what you can.
Step 3: Keep paying the taxes you owe even after you file and talk to the IRS about a payment plan.
Once Tax Day passes, you’ll have a month or two before the IRS contacts you about the rest of your taxes owed. During that time, keep throwing every available dollar at the balance with the goal of paying it off before they ever contact you.
If you can’t pay off your tax bill by that time, you should apply on the IRS website for a payment plan. And good news—you can set up the plan online without having to call the IRS and wait on hold for hours!
Jennifer M. found the IRS easy to work with when she set up a payment plan.
“They were flexible and willing to work with our specific situation. Basically, they asked us what we could afford each month, and we went from there,” she explained.
The IRS offers a short-term payment plan (120 days or less) for bills that are less than $100,000.1 Long-term monthly plans are available for balances less than $50,000.2 Long-term plans require a set-up fee that ranges from $31 to $130, but the fee could be waived if you fall into the category of low income.3
Jennifer put her tax debt at the top of her debt snowball plan and was super motivated to get rid of it as fast as possible. And she did, in less than a year!
Step 4: Correct the problem so you don’t have an unaffordable tax bill again.
Work with a tax expert you can trust to make sure you’re not stuck with taxes you can’t afford again. That may mean setting aside profits from a side business, making quarterly tax payments, or adjusting the withholding from your paycheck. Whatever the issue, a tax pro will be able to spot the problem and help you fix it going forward.
To save time and hassle, make sure you gather the right paperwork the first time around. Not sure what kind of paperwork you need? Download our free tax preparation checklist.
April N. underestimated her income and was left owing a couple thousand dollars at the end of the year.
“I messed up last year by not setting aside taxes for my second job or home business,” she said.
Not wanting to face the same situation the following year, she enlisted the help of a tax expert who set her on the right tax plan.
“Now I have a CPA to help organize quarterly payments for this year so it won't happen again!” she said.
What Happens if You Don't File Your Taxes?
You’re playing with fire if you don’t file a tax return when you owe taxes. It’s not just irresponsible. It’s illegal. And the IRS will penalize you.
The failure-to-file penalty is 5% of the total of your unpaid taxes for each month your taxes are late.4 After five months, the penalty tops out at 25% of your tax bill.5 Oh yeah, the IRS also tacks on interest on top of penalties.
Failing to file a return could land you in jail for up to a year for every year you fail to file, but the IRS will usually look for other ways to resolve an issue with a taxpayer before taking steps to put them behind bars.6
Filing Your Taxes Late
So, when it comes to filing your taxes, the old saying holds true—better late than never! You’ll be in a much better spot with the IRS if you just go ahead and file your tax return, even if you don’t have the money to pay your bill. Don’t wait for the IRS to catch you. Once you file, you’ll also get a break on penalties and interest.
What Happens if You Don’t Pay Taxes?
If you filed your tax return but aren’t able to pay your bill, you have a couple of other options besides setting up a payment plan.
The failure-to-pay penalty is 0.5% per month up to 25% of your unpaid taxes.7 It’s much lower than the failure-to-file penalty, so the lesson here is to always file your taxes on time. If you’re proactive and set up a monthly payment plan, the IRS will lower your failure-to-pay penalty to 0.25% per month until your bill is paid in full.8
Paying Your Taxes Late
If you truly are experiencing a financial hardship such as a death of a spouse or the loss of a job, you can ask the IRS to place your bill in its “currently not collectible” status. While this will give you more time to pay (and get the bill collectors off your back for a while), penalties and interest will continue to accrue until you pay your bill in full.9
Another option is to apply for an offer in compromise (OIC). This is a type of tax relief that lets you settle your tax debt for less than you actually owe. When you apply for an offer in compromise, you’re basically offering the IRS an amount you can pay in the hopes they will accept the lower amount and settle your tax debt. The IRS looks at your ability to pay, your income, your expenses and how much your stuff is worth to decide if your offer really is all they’ll be able to get from you.
But you should know that the odds of qualifying for an offer in compromise are pretty low. OIC applications are rarely approved, and you usually have to be in a really bad financial situation to get this kind of tax relief.
Can You Go to Jail for Not Paying Your Taxes?
Okay, we’re not living in the time of Charles Dickens anymore. You can’t go to debtors prison for not paying your taxes. (The United States outlawed debtors prisons in 1833.)
But if you have a tax bill and aren’t making an effort to pay it (dumb move), the IRS can take several of what they call enforcement actions. They might garnish your wages (have your employer withhold a portion of your paycheck until the debt is paid), levy your bank account (take money out of your account without your permission), put a lien on your property, or seize your property.
Now if you deliberately hid large sources of income, lied on your tax returns, or didn’t file a return to avoid paying taxes, you’re guilty of tax fraud or tax evasion. And, yes, you can certainly go to jail for this depending on the severity of your crime.
Not to go history buff on you, but gangster Al Capone spent eight years in prison for tax evasion. (It was the only crime the FBI could pin on him.)
Get Your Taxes Done Right
If you find yourself in a tax mess, an Endorsed Local Provider (ELP) can help you get the IRS off your back. These tax pros know their stuff, and that’s why they’re RamseyTrusted.
If you’re confident you can handle your taxes on your own and just want easy-to-use tax software, check out Ramsey SmartTax.