What to Do if You Cannot Afford to Pay Taxes

What can you do if you can’t pay the taxes you owe come April? Should you borrow from your 401(k) or is there an IRS tax payment plan option? This is especially important for many Americans that collected unemployment for the first time this year, and didn’t realize that unemployment benefits are taxable. Many of them are in precarious and vulnerable position. In this article, H&R Block walks you through a few options — from borrowing from your 401(k) to arranging an IRS tax payment plan.

“Any taxpayer who is unable to pay his or her tax bills should still complete a return or file a tax extension by April 18, to avoid costly penalties and interest,” said H&R Block social media manager Leigh Mutert, CPA. The monthly penalty for not filing a tax return is 5%, while the penalty for not paying in full is one-tenth of that, or 0.5%. Even if you cannot pay all of your taxes, you should send what you can with your tax return or extension to file.

An H&R Block professional tax advisor can help you determine what’s best for you; get a free 30-minute tax consultation at an H&R Block office near you.

Three Ways to Pay Your Taxes

If you cannot afford to pay your taxes, there are three ways to deal with this.

Tax payment solutions close to home

  • Borrowing money from your 401(k) — There is no early distribution penalty and you the taxpayer would pocket interest paid for the borrowing rather than paying interest to a 3rd party lender.
  • Accessing funds using a credit card — But you often face double-digit interest rates and must pay IRS service providers’ processing fees ranging from 1.90 to 2.35%.
  • Borrowing money from family or friends — For some taxpayers, the best bet may be borrowing money from family or friends.

Working with the IRS

Taxpayers can work with the IRS to file a tax extension to pay or to arrange an IRS tax payment plan. Interest rates and fees depend on the route taxpayers choose.

  • Taxpayers who can pay their debt within 120 days can file a tax extension. If a $1,000 tax debt is owed, the total amount paid over four months would be $1,033* with penalties and interest.
  • Those who need more than 120 days can use an IRS tax payment plan. If a $1,000 tax debt is paid off in six months, the total amount paid would be $1,066**. Tax debt must be repaid within five years through an installment agreement.

Taxpayers who file a tax extension or opt for an IRS tax payment plan may incur debts on their credit reports, but these debts do not cause the same harm as a property lien.

Solution for those with financial hardships

An IRS offer in compromise (OIC) settles a tax debt for less than the amount owed. The IRS will negotiate with eligible taxpayers to collect what it can. However, only 24% of OICs were accepted in FY2008, and the application process can take up to two years. “It’s not as easy as just asking the IRS to forgive the debt,” Mutert said. “Seeking an offer in compromise is time consuming and requires as much work painting your financial picture as getting a home loan.”

Here are some specifics about OIC:

  • New this year, the IRS weighs present and future earnings when deciding OICs, instead of just prior years’ earnings.
  • Taxpayers must be current on filing tax returns, not in bankruptcy, and meet one of three conditions to be eligible:
    1. Taxpayer’s assets and income combined equal less than tax debt owed.
    2. Taxpayer believes the tax debt assessed is incorrect and there is no legal decision on the matter.
    3. The full tax debt is owed and is collectible, but a special circumstance exists, such as serious illness or the likelihood to deplete finances.

Get Expert Tax Advice on Tax Payment or Any Topic

H&R Block has a 100% accuracy guarantee and will support you in the unlikely event of an audit. H&R Block At Home online and desktop solutions for tax filing make it easy to file in the convenience of your own home, or you can find an H&R Block office near you.

* Includes a $20 failure-to-pay penalty and $13 in interest. Interest is the federal short-term rate (currently 0.67%t) plus 3 percent.
** Application fees range from $43-$105, example uses $52. The failure-to-pay penalty is $6 and interest is $8 (up to 25%).

About the Author

By , on Jan 31, 2011
Pinyo
Pinyo is the owner of Moolanomy Personal Finance. He is a licensed Realtor specializing in residential homes in the Northern Virginia area. Over the past 20 years, Pinyo have enjoyed a diverse career as an investor, entrepreneur, business executive, educator, and financial literacy author.

2013 Tax Center

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2013 Important Tax and Filing Dates

Leave Your Comment (13 Comments)

  1. Barbara says:

    I lived in NJ and lost my job, I started collecting my unemployment benefits with federal taxes being deducted. NJ does not require state taxes on unemployment benefits. After a year and not finding work I moved to SC still collecting benefits from NJ. I filed my taxes and now SC Dept of Revenue is saying I owe them state taxes, is this true?

  2. Perry Stubb says:

    What a great list of suggestions. I couldn’t pay one year in high school. To be fair, I was pretty clueless about taxes back then, luckily my parents loaned me the money (it wasn’t that much) and I paid them back in a couple of weeks.

  3. Lawson says:

    @Donny that is not true in all situations. There were many hard working Americans that saved their money and unfortunately lost it due to the stock market and or had to spend it for health care and to pay their bills because they were laid off.

  4. christine says:

    if a person receive unemployment for a year and i didnt have taxes tooken out but i have dependents will i get a refund

  5. Pinyo says:

    @Lucia – Both of your daughters has to report unemployment income. Other factors may reduce their tax burden.

    @Patricia – Not sure. This is one of those situations where I would consult a tax professional. My guess is that you have to report it as income this year, and if you have to pay it back, the amount would be reflected in the next tax year.

  6. Patricia MacEachern says:

    I collected 4628.00 in 2010 in unemployment. The employer fought it with a lawyer and won. Now they are asking for the money back to unemployment. i was shockd since they determined I was eligible. I filed for a waivor but have not heard yet as to whether I must pay it back. Do I declare it as income on my tax return? What will happen if I need to repay it. Can I deduct it the next year?

    Pat

  7. Kathy says:

    I would like to share my situation for ventng enjoyment and hopefully to cheer up someone else. Great 80k sales job decided to reconstruct pay so 35k was all they would pay with almost the same work load. Confusing new base an bonus details changed for the worse every three month from 2009 to 10. I changed my deductions in 2010 to increase net pay which means I stopped paying taxes. In March I quit without a new job. Fed up, insulted and hurt. Cashed out my 401k for 10k. Worked Census job for 2 months. Then went on unemployment an still didnt pay taxes. Credit card maxed to 6k. Car payment of 300 a month and car isnt worth the ammount I owe. Too many miles from sales job. See? Your problems aren’t so bad are they? Wish I could just ignore IRS like I do the Visa debt. Bad luck added to bad money management is no fun at all.

  8. LUCIA says:

    ONE OF MY DAUGTHER GET UNEEMPLOYEMENT16,000.00 BUT SHE DID NOT WORK LAST YEAR SHE WAS IN SCHOOL, SHE DID NOT KNOW THAT SHE HAVE TO PAY TAX, DID SHE HAVE TO PAY TAX IF SHE DOES NOT WORK AND WAS IN SCHOO?

    MY OTHER DAUTHER ALSO SHE GET 8,000. DID NOT WORK AND SHE DOES NOT PAY TAX SHE DID NOT, SHE IS NOT IN SCHOOL BUT SHE HAVE A DAUGTHER, SHE HAVE TO PAY?

  9. Pinyo says:

    @Erika – did you withhold taxes from your unemployement benefits? If you didn’t, it’s unlikely that the dependent tax credit will offset the income taxes owe on unemployment. It’s likely that you will owe money. Sorry.

    @Jill – I understand your aggrevation, unfortunately, unemployment benefits are taxed as ordinary income.

  10. Jill says:

    It aggrevates me that the IRS even taxes the unemployment. We already paid taxes on the salary made to be able to qualify for unemployment. So, we are taxed twice. I had taxes taken out of my unemployment for the first 6 months(Jan-June), then the last 6 month I had no taxes taken out(July-Dec). BAD MOVE! I ove 600 to federal and 600 to state. I DO NOT UNDERSTAND WHY? I feel so taken advantage of, and think that this government is so corrupt. And, I didn’t work off the books and collect cash like every other teacher I know who got laid off did-I was honest. Bite me in the a**.

  11. Thanks for the tips Pinyo.
    One other thing I do is I don’t pay taxes on credit.
    The interest rate on my credit card is likely much higher than the 4 percent interest rate the IRS will charge, so it makes more sense to work out a deal with the government than to charge your taxes.

  12. Erika Navarro says:

    I received 25,000 dollars from the unemployment office last year in 2010. My question is, “will I receive any money or return after I file my taxes by claiming my daughter of 18 months or will I have to pay taxes?” Oh, and I am a single mom.

    Thank you,
    Erika N

  13. Donny Gamble says:

    Taxes put so many people in debt every year because Americans just don’t know how to save their money.

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