What Can You Do if You Can’t Pay Your Taxes?

We're in ‘Tax season,' and like millions of Americans, you could dread the number appearing in that “taxes you owe” box if you don't qualify for a tax refund.

TIME magazine reports that the average federal income tax refund was $3,039 in 2022, likely due to temporary pandemic-related tax benefits and other provisions such as expanding the child tax credit. However, most of these provisions have expired for the 2023 tax year.

When combined with record inflation that most people feel has not realistically indexed with most tax benefits, smaller tax refunds or owing taxes will be a painful reality for many people who typically would not have a balance due.

If you owe taxes but can't afford to pay your income tax bill, don't panic! Here's what you can do if you can't pay what you owe.

Always File Your Tax Return First

It sounds counterintuitive initially, but this step is one of the most important things you can do. This is because massive tax debts and IRS problems virtually always stem from tax returns that are missing in the first place, sometimes for years.

If you don't file your tax return by the deadline – April 18, 2023, for the 2022 tax year, October 16, if you file for an extension – the IRS can assess a failure-to-file penalty. It starts at 5% of your unpaid taxes for each full or partial month that your tax return is late, with a maximum of 25% of the balance.

For instance, if you owe $2,000 in taxes and put off filing your tax return because you knew you couldn't afford to pay it, the penalty is $100 if you file late in May. If you put it off until October, it maxes out at $500. However, other penalties still rack up, such as the failure to pay penalty and additional interest on the unpaid balance.

This penalty can be prevented by filing your tax return on time, even if you can't afford to pay any of the balance due.

The IRS has also put more muscle towards taxpayers who have not filed their tax returns at all. One way they do this is by filing a substitute tax return on your behalf if enough time has elapsed since your tax return was due, but you still didn't file it. Substitute tax returns are automated from data attached to your Social Security number, such as W-2 and 1099 forms. However, substitute tax returns don't claim any deductions or other benefits you may be entitled to that would reduce your tax bill.

Paying some of the balance when you file your tax return is always helpful but not required if you can't afford to pay the balance right away. Nevertheless, ensuring your tax returns are filed on time prevents balances from ballooning and becoming even more challenging to afford over time.

Request That Your Account Become Currently Not Collectible

If you have a balance due that you cannot pay and fear collection actions from the IRS, you can contact them and request that they make your account temporarily uncollectible.

By going into “currently not collectible” status, it will stave off any attempts made by the IRS to collect on your balance. Depending on your tax filing history, the agent may request proof of your financial situation, where you must fill out a collection information statement.

But if it's your first time requesting this status and your reason is extenuating circumstances like natural disasters, fleeing domestic violence, or long-term illness or disability, this statement is often waived, and your account will immediately become uncollectible.

Depending on how much you owe in taxes, the IRS may still place a federal tax lien on your assets. However, they cannot actually levy (seize) your assets through actions like a wage garnishment or selling your home while you are under “currently not collectible” status.

Start an Online Payment Plan

Most people with tax bills they can't pay will qualify for an online payment agreement. The IRS offers two types of online payment agreements:

Short-term: paid off in 180 days or less, total balance due must be $100,000 or less in combined taxes, penalties, and interest

Long-term: total balance due must be $50,000 or less in combined taxes, penalties, and interest, and all outstanding tax returns have been filed

Short-term online payment agreements are free to set up, while long-term plans have a $31 setup fee, which is waived for low-income taxpayers. However, this low setup fee only applies if you arrange for automatic monthly debits. If you want to avoid automatic debits and go for a manual payment option, the setup fee is $130. You must also use this manual payment plan if your balance is more than $25,000.

If the online payment plans don't fit your needs, you must request an installment agreement by mail or phone, which entails higher setup charges.

More often than not, the IRS is willing to work with you on paying what you owe. Simply filing your tax returns, even if you can't afford to make payments, will prevent most future headaches.

This article was produced and syndicated by Wealth of Geeks.