Plan B for Paying Your Taxes When You’re Short on Cash

Your Guide to State, Local, Federal, Estate + International Taxation

Whether you accidentally withheld too little on your paycheck, your business made more money than you expected, or you just really didn’t plan so well this year, circumstances sometimes arise when your individual income tax bill is higher than you anticipated. So what are your options when you owe the IRS, but cash flow is tight?

The IRS expects you to pay your tax liability in full by April 15th, regardless of whether or not you are filing an extension. An extension after all, is only an extension of time to file, not an extension of time to pay. So even if you can’t pay everything, make sure to file your return on time so you don’t incur failure-to-file penalties. After making sure to timely file, you have several options for paying your tax obligation.

Able to pay full amount within a short time after the deadline

If you are unable to pay your full tax liability by the deadline, but are able to pay the full balance within a couple months of the deadline, it’s best to pay as much as you can by the due date to reduce any potential penalties and interest. From there, the IRS will issue you a notice of balance due at which point you can pay the remainder. The cost of paying this way is that the IRS will charge interest on the unpaid balance at the federal rate plus a late payment penalty of 0.5% monthly (not to exceed 25% of the total tax outstanding).

Able to pay within 120 days of the deadline

Another option for paying late is to request a short-term payment extension with the IRS if the full balance can be paid within 120 days. This can be accomplished by calling the IRS directly to set it up over the phone, by having your tax preparer set it up if they have the proper Power of Attorney form signed, or going online to the IRS website here. The short-term extension allows taxpayers who owe $50,000 or less and have filed all required tax returns to set up a payment plan via direct debit, payroll deduction, etc. There is no set-up cost involved with this option, but you may be charged penalties and interest as noted above.

Owe more than $50k or need more than 120 days?

If paying within 120 days is not doable for you, you can enter into a longer payment plan with the IRS. If you have filed all required tax returns and owe $50,000 or less, you can set up an online payment plan using the same website above. You should receive instant notification of acceptance and are allowed to make payments for up to 6 years depending on what plan you set up. Another benefit of this option is that you can log in to your account at any point and make certain changes to your agreement.

If you don’t qualify for the online payment agreement, you can apply for an installment agreement using Form 9465. If you owe more than $50,000, you must also attach Form 433-F which requires you to disclose more in-depth financial information.

Whether setting up a long-term payment agreement online or through Form 9465, you will be charged an initial set-up fee ranging from $43 – $120. You will also incur late payment penalties and interest until the balance is paid in full.

Undue hardship

If you are unable to pay your tax liability because doing so would cause undue hardship, you can apply for a 6-month extension of time to pay using Form 1127. In order to have your request accepted, you must be able to prove that you are unable to sell assets or borrow money without severe loss and provide a detailed explanation of the undue hardship that would result. You must also provide supporting documentation to substantiate your claim. If approved, you will not be charged late payment penalties, but interest may still accrue.

A couple other things worth mentioning

Since most all options outlined above include penalty fees, there are certain instances when you can request a waiver of these penalties by writing a letter to the IRS. You must provide reasonable cause or request a waiver under the First Time Abate (FTA) policy.

As always, if you need help with these issues, your tax adviser is a great resource for getting you on back on track with your taxes.

By Kristen Janik, CPA