First, Take A Deep Breath. You’re not alone. Shit happens.
Next, let us walk you through the steps of what happens when you can’t pay your taxes—and what you can do about it.
Keep reading to learn how the IRS handles unpaid tax bills and what your options are to pay them.
What Happens If You Don’t Pay Taxes?
We know it’s really fucking scary to be in debt of any kind (especially with the government), but here’s the cold, hard truth: It’s normal.
Yes, that doesn’t make it any less frustrating or frightening, but we promise you that you aren’t the only one wondering, “What the hell happens to me if I don’t pay my income taxes?”
We’ll keep the bad news brief so we can get to the good news and go over your options to pay.
So, here are the consequences if you don’t make your payment before or on April 15th (a.k.a. Tax Day):
No one likes paying interest.
The current federal interest rate for underpayments can be found here. That number can change on a quarterly basis determined by the IRS.
You incur interest each day your payment is late with the fee being tacked onto your total tax bill along with any penalties you may have. Speaking of penalties…
When you’re late paying your tax bill, the IRS applies a standard penalty. The current rates can be found here.
The exact amount of the penalty comes down to how much you owe. After a period of time, the penalty is capped. So just know that it won’t keep accruing infinitely.
What You Can Do To Pay
On to the good news.
All hope is not lost when you realize you won’t be able to pay your taxes by April 15th. Just throw that shit on a payment plan and move on with your life. Focus more on saving for this year’s taxes than worrying about last year’s taxes.
In fact, there are 3 super helpful options to work with the IRS and pay down your tax bill. Let’s dive in:
1.) Apply for the IRS Payment Plan
You can apply for a payment plan (also known as an installment agreement).
Most people will be able to qualify. Even if you don’t, still reach out to a tax professional who may be able to get you on a payment plan.
The best part is you don’t have to get on the phone and talk to the IRS (always a plus!!). All you have to do is apply here and select which payment plan you’d like to qualify for.
There are two options:
- Short-term: Apply for this one if you can pay your bill within 120 days.
- Long-term: Apply for this plan if you need more than 120 days.
2.) See If You’re Eligible for the Offer in Compromise Program
You may be able to settle your tax debt altogether by showing the IRS how their payment plans will put financial strain on you or your business.
To do this, you’ll need to pull out all your financial statements that paint a super accurate picture of your business’s financial health. These statements include documents like your balance sheets, cash flow statements, and income.
Check out the deets and application form here.
3.) Apply for Penalty Abatement
The IRS can waive your penalty fees if it’s your first time being in tax debt.
Just like the Offer in Compromise program, the IRS will need to see proof that you acted in good faith and still couldn’t pay your taxes.
If you’re approved for a penalty abatement, this will also reduce interest fees. Hell yeah!
What You Can Do To Hopefully Avoid This
Even the best intentions and careful planning can still result in an unpaid tax balance to the IRS.
If you feel like maybe your planning wasn’t so much on the super careful side, keep reading for our favorite tax payment tips!
1.) Apply the 70/30 Rule
If you’re on a payment plan or behind in your taxes at all, don’t allocate every dollar you can to the prior year(s). If you do that, chances are you’ll always be behind.
Instead, let’s say you can afford to allocate $1,000/month towards your tax debt. $700 of that (70%) should go towards the current year taxes with the remaining $300 (30%) towards any prior year taxes.
With a system like this, you’re more likely to stop the cycle and leave the prior year debt in the prior year. Bye bitch.
2.) Make Sure You’re Saving Enough for Taxes
Each month (twice a month, ideally) sit down and look at how much cash came into your business. Transfer out at least 15-25% of every dollar you receive to a separate account to save for taxes. Or, look at how much money your business profited (income after expenses) and transfer out 30-40% of that for taxes. These are rough estimates so make sure you work with your accountant on what figures work best for you.
3.) Make Estimated Tax Payments
Everything you need to know about calculating and paying your estimated taxes online can be found here.
Please reach out, we’d love to help!
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Countless assumes no liability for actions taken in reliance upon the information contained herein.