Finding yourself unable to pay your tax bill can be stressful, whether you're a small business owner or individual taxpayer. The good news? You have options.  

Here's what you need to know if you can't pay the taxes you owe this year or from other years, or if you have unfiled tax returns. (Remember, in each of these situations, time is of the essence to reduce the pain of penalties and interest, so let's go!) 

File your return anyway 

Always file your tax return on time, even if you can't pay the full amount owed. The penalties for not filing are significantly higher than the penalties for not paying: 

• Failure to file penalty: 5% of unpaid taxes per month (or part of a month), up to 25% 

• Failure to pay penalty: Only 0.5% of unpaid taxes per month, up to 25% 

• Late penalty: If your return is over 60 days late, the minimum penalty increases to the smaller of $485 (for 2024) or 100% of the tax owed. 

When both penalties apply simultaneously, you could face a maximum combined penalty of 47.5% of your unpaid taxes plus interest on unpaid taxes. 

Explore the payment options available to you 

1. Pay what you can 

Pay as much as possible when you file. This reduces both the amount subject to penalties and the interest that accrues on your unpaid balance. 

2. Consider IRS installment agreements 

The IRS offers several payment plan options: 

• Short-term payment plan: If you can pay within 180 days, you can set this up online with no setup fee. 

• Long-term payment plan: For amounts under $50,000, you can apply online for a monthly payment plan. The setup fee is $31 if you pay electronically through direct debit. 

These plans don't eliminate interest and penalties, but they prevent more aggressive collection actions. 

3. Look at an offer in compromise 

If you're experiencing genuine financial hardship, you might qualify for an Offer in Compromise, allowing you to settle your tax debt for less than the full amount. The IRS evaluates your ability to pay, income, expenses, and asset equity when considering these offers. 

4. Request a temporary delay in collection 

If paying your taxes would prevent you from meeting basic living expenses, you can request that your account be classified as "currently not collectible." This doesn't eliminate your debt but temporarily halts collection actions. 

Common mistakes to avoid 

1. Don't use high-interest credit cards to pay your taxes: The IRS interest rate (currently around 8%) is typically lower than credit card rates. 

2. Don't ignore IRS notices: They won't disappear, and ignoring them can lead to liens, levies, or wage garnishments. 

3. Don't withdraw from retirement accounts unless absolutely necessary: Early withdrawals typically incur additional penalties and tax consequences. 
    

Do you have unfiled returns from previous years? 

If you also have unfiled returns from previous years, it's crucial to file them as soon as possible. The IRS can file a Substitute for Return (SFR) for you, which may not include all deductions and credits you're entitled to.  

Filing your own returns allows you to claim those benefits and potentially reduce your tax liability. Additionally, unfiled returns can lead to further penalties and interest and may prevent you from receiving any refunds you're owed. 

How serious is the IRS when it comes to delinquent taxes? 

Not filing your taxes or failing to pay your taxes in a timely manner are serious issues that you definitely want to avoid. Consider this fair warning from irs.gov:  

“The IRS will certify taxpayers with seriously delinquent tax debts to the State Department for specific actions regarding their passports.  
Generally, the State Department will not issue passports to taxpayers after receiving their delinquent debt certification from the IRS. The State Department may also deny a taxpayer’s passport application or revoke their current passport.  
If taxpayers with certified tax debts are overseas, the State Department may issue a limited-validity passport allowing the taxpayer to return directly to the United States.” 

Debts excluded from being classified as seriously delinquent 

The following types of debts are not considered seriously delinquent tax debts: 

• Child support obligations. 

• Debts that are being paid on time under an IRS-approved installment agreement. 

• Debts being paid in accordance with an accepted offer in compromise. 

• Penalties related to the Report of Foreign Bank and Financial Accounts (FBAR). 

• Settlement agreements established with the Department of Justice. 

• Debts where a timely request for a collection due process hearing regarding a levy has been submitted. 

• Debts suspended due to a pending request for innocent spouse relief. 

Situations where the IRS will not certify serious delinquent tax debt 

The IRS will not certify an individual as having seriously delinquent tax debt if: 

• The account has been deemed “currently not collectible” due to financial hardship. 

• A request for an installment agreement or an offer in compromise is currently pending with the IRS. 

• The taxpayer is identified as a victim of tax-related identity theft. 

• The taxpayer is in bankruptcy proceedings. 

• The taxpayer resides in a federally declared disaster area. 

• An IRS adjustment has been accepted that will fully resolve the outstanding tax debt.

Additionally, the IRS will delay certification for taxpayers who are actively serving in a designated combat zone or participating in a contingency operation. 

Make plans for the future to avoid tax perils 

If you are facing a seemingly insurmountable tax bill or even one unfiled tax return, use this experience as motivation to improve your tax planning: 

• Maintain a tax savings account separate from your regular business or personal accounts. 

• Consider professional tax planning to identify deductions and credits you might be missing. 

For small businesses: Set aside tax money with each payment you receive rather than waiting until tax time. 

For individuals: Adjust your W-4 withholding if you're an employee or make quarterly estimated tax payments if you have other income sources. 

Don’t face tax challenges alone 

Remember, the IRS routinely works with taxpayers who cannot pay in full. The agency has established procedures to help you. The key is to be proactive, communicate with them, and demonstrate your commitment to fulfilling your tax obligations. 

If you're feeling overwhelmed, consulting with our firm can help you navigate these challenges and develop a sustainable plan for tax compliance.