Should You File Your Tax Return If You Can’t Pay?

Many individuals are uncertain whether they should file their tax returns even when they find themselves unable to pay their due taxes. The answer is a resounding yes: you should file your return. This article will explain why, what happens if you don’t, and how you can handle filing even when you’re unable to pay immediately.

Why Should You File Your Tax Return?

1. Avoid Late Filing Penalties

The Internal Revenue Service (IRS) enforces strict penalties for late filing. The failure to file penalty is typically 5% of the tax due for each month or fraction of a month your return is late, with a maximum of 25% if it goes beyond 5 months. For instance, if your tax liability is $1,000, the immediate 5% penalty is $50. If you file late, you would incur a smaller penalty each month until the tax is paid in full.

2. Avoid Interest Accumulation

In addition to penalties, interest accrues at an annual rate of 8%, which translates to approximately 6.67% per month. The faster the payment is addressed, the less interest you’ll have to pay. Filing a return starts the clock on those penalties and interest, giving you more leeway to come up with a payment plan.

Steps After Filing If You Can’t Pay Immediately

1. Respond to IRS Communications

After filing your return, the IRS may send you a bill and ask for payment installments. You do not need to set up a formal agreement if you think you can pay the balance within 120-180 days, but you must respond to any letters the IRS sends. If you need a longer period, you can set up a formal agreement. There is a fee for this process, but it is reduced for those under a certain income limit and those who authorize automatic payments. Fill out Form 9465 to start this process.

2. Consider a Payment Plan

Many taxpayers find it beneficial to set up a payment plan with the IRS. Once approved, you can pay a smaller, more manageable amount each month until the entire balance is cleared. This approach eliminates the need to pay the full amount upfront.

What Happens If You Don’t File?

1. Financial Penalties and Interest

If you don’t file your return, the financial repercussions are significant. At first, there is a 5% penalty each month for each month or part of a month your return is late, with a maximum of 25% for the first 5 months. Additionally, interest keeps accruing, making the overall tax burden greater over time.

2. Collection Actions

Failure to file will eventually trigger collection actions by the IRS. Collection may not begin for at least 90 days, and in some cases, it can take years. However, it is far better to avoid this route and work out a plan within the system.

Getting Help

If you find yourself in this situation, seeking assistance from a professional can be highly beneficial. An Enrolled Agent Tax Resolution Specialist can help you navigate the complexities of IRS regulations and develop a plan that suits your specific financial situation. These specialists can guide you on how to file, how to manage penalties, and how to set up a payment plan that works for you.

Moral of the story: always file your tax return, even if you can’t pay immediately. Proper filing can help you avoid significant penalties and interest, and it allows you to start addressing your tax debt. For multiple years of unfiled returns, seek assistance from a tax resolution specialist and prioritize knowing if the IRS has filed a substitute for return.