The federal tax deadline is one week away for most Americans, and if you can’t cover your balance by April 18, you may have options, tax experts say.
Whether you file on time or request an extension, you need to pay taxes owed by the original due date to avoid racking up penalties and interest.
Skipping the filing deadline is the “biggest mistake” taxpayers can make, according to Lawrence Pon, a certified financial planner and certified public accountant at Pon & Associates in Redwood City, California.
Here’s why: The penalty for failure to file is 5% of your unpaid balance per month, capped at 25%, plus interest. By comparison, the late payment penalty is 0.5%, also levied monthly and limited to 25%, with interest.
However, some areas, such as most of California and parts of New York, have more time to file and pay this season due to natural disasters, Pon said. There’s a full list here.
Don’t ignore IRS notices
Another common mistake is ignoring IRS correspondence once you’ve fallen behind on your taxes, experts say.
Sheneya Wilson, a CPA and founder of Fola Financial in New York, said avoiding negligence is her “biggest piece of advice.”
If you receive an IRS letter for an unpaid balance, you need to respond to that notice quickly, she said. Otherwise, solutions with the agency may become more challenging.
Whether you’re wrestling with a first-time balance or older tax debt, here are some options to consider.
1. Installment agreements
Wilson said the most popular option is to apply for an installment agreement, which is a long-term monthly payment plan through the IRS that “takes about five minutes” to set up.
If you owe $50,000 or less, including tax, penalties and interest, you can set up an installment plan online, but you’ll have to call the IRS for larger amounts, she said.
However, the agency won’t approve the plan if you have unfiled returns from previous tax years. And if you miss a payment, the IRS can cancel the installment agreement and your remaining balance will be due, Pon warned.
2. Offer in compromise
Another option, offer in compromise, may allow you to settle for less than you owe. But the IRS urges taxpayers to explore “all other payment options” first.
If you can prove you’ve gone through financial hardship, it’s possible to reduce your balance through an offer in compromise, Wilson said.
“The IRS does allow you to significantly knock down the total amount due,” she said. But you must be current on all returns and up to date on estimated tax payments to qualify.
You can start with the Offer In Compromise Pre-Qualifier tool to gauge eligibility and send an application from the Offer in Compromise Booklet.
3. Currently not collectible
There’s also a “currently not collectible” status, in which the IRS temporarily stops trying to retrieve unpaid balances.
If the status is approved, your debt may still accrue penalties and interest, and the IRS can use your future tax refunds to cover the balance, according to the Taxpayer Advocate.