Money Matters: Even if you can't pay your taxes, file your return

 Peter G. Robbins, The Daily Record Newswire

Q: I was not able to pay all my taxes by the extended due date of my return. My certified public accountant told me I should file my return anyway, but I didn’t want to alert the Internal Revenue Service that I still owe money. I went ahead and filed since my CPA was insistent. Did I make a mistake?

A: No, you did not make a mistake, and you should thank your CPA for good advice. While an extension of time to file a return delays the final due date of your tax return, the extension request does not extend the due date for paying your tax liability. The IRS will charge interest and can charge penalties on any tax that is owed and not timely paid. But filing the tax return helps to lessen the penalties.

Late payment: If you don’t pay the tax you owe by the due date, you are charged a penalty, which is normally one-half of 1 percent of your unpaid taxes per month. So even if you are not able to pay all the tax you owe, paying as much as you can as soon as you can lessens this penalty. Also, if you make sure at least 90 percent of the tax you owe is paid by the original April 15 deadline, file a valid extension request, and pay the rest of the tax by the Oct. 15 extended deadline, no penalty will be assessed.

Late filing: If you don’t file your tax return, you can be assessed a greater penalty, which is normally 5 percent of the unpaid taxes for each month that a tax return is late, capped at 25 percent of your unpaid taxes. The monthly accrual of this tax is much more than the penalty for failure to pay. Consequently, it is always best to file the return even if you can’t pay all the tax.

The IRS does have some ability to waive these penalties if you can show reasonable cause for not filing or paying on time. Over the years I have found that what my clients have felt was reasonable and what the IRS deems reasonable are two different things. Also, there is a First Time Abate provision under which the IRS can waive one penalty if the taxpayer has a clean three-year history of timely compliance. And remember, regardless of the penalties, the IRS will charge interest on any taxes that are paid late. The interest assessment is statutory and will not be waived.

Q: My second question is: Since I can’t pay right now, what are my options?

A: First, pay what you can when you file your return. The IRS will send a letter, usually within 30 days, telling you more tax is owed. If possible, pay the balance when this letter is received. But if you know you won’t be able to pay your tax, you can take advantage of several IRS payment programs. Don’t try to hide from the IRS; they will work with you to try to develop a payment plan.

The IRS normally encourages taxpayers to obtain a loan or use a credit card to make payment. If you can find a very low-interest loan this strategy can work, but be careful since the interest rates charged by most financial institutions and certainly by most credit card companies usually exceed what the IRS will charge. Further, there is normally a fee charged by the processing company for payment by debit or credit card, which can be prohibitive. Consequently, I never recommend paying with plastic.

Your first option for working with the IRS is to request a short-term agreement, which allows you to pay your tax balance in 120 days or less. There is an online payment agreement application, or you can request it by calling the IRS.

If you don’t believe you will be able to pay within the 120-day period, you can apply for a payment plan either online, via phone or by filing Form 9465, Installment Agreement Request. If you owe more than $50,000 the IRS will also require that you complete Form 433F, Collection Information Statement.

If there is little hope that you will be able to settle your tax obligation, the IRS has other programs to help. The Offer-in-Compromise and related Fresh Start programs allow you to negotiate with the IRS and settle your tax debt for less than the full amount you owe. This is often an involved process, and I would recommend that you use a qualified professional if you choose to go this route.


To ensure compliance imposed by IRS Circular 230, any U.S. federal tax advice contained in this article is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed by governmental tax authorities. The answers in this column are meant to offer general information. You should consult your tax adviser regarding the specifics of your situation.

Peter Robbins is a partner in the Boise office of CliftonLarsonAllen LLP, specializing in tax matters for small businesses, individuals, and trusts and estates.


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