Every year, thousands of people are unable to pay their taxes. This can be an awful situation to find yourself in, leaving you with feelings of stress and uncertainty. Oftentimes, people suffering a financial hardship know that they will not be able to afford their tax bill before they even file. In this situation, it may seem like there is no point in even filing your taxes at all. However, this is not the case. Filing and paying your taxes are two completely different obligations. You should always file your taxes, even if you can’t pay. Let’s take a look at the reasons behind this.
Failure-to-File Vs Failure-to-Pay Penalties
Failure-to-file and failure-to-pay both have IRS penalties associated with them. However, these penalties are not the same. Penalties for each case are as follows:
● Failure-to-File: When you do not file your taxes at all, the resulting penalty is 5% of the amount owed for every month or partial month that your debt goes unpaid. The penalty accrues up to a maximum of 25%.
● Failure-to-Pay: When you fail to pay the taxes you owe by the due date, the resulting penalty is 0.5% of the unpaid taxes for each month or partial month that the tax remains unpaid. This penalty also accrues up to a maximum of 25%.
As you can see, the penalty for failure-to-file increases much more rapidly than the penalty for failure to pay. By filing, even when you can’t afford to actually pay your taxes, you will ensure that you are hit with the smaller of the two penalties. Including interest that accrues on penalties, choosing to file can end up saving you thousands of dollars.
Filing Helps You Avoid IRS Substitute for Return (SFR)
When you fail to file, the IRS will send you a notice instructing you to do so. If you ignore this notice and still don’t file, the IRS will create a Substitute for Return (SFR). This is a tax return that the IRS prepares themselves. However, an SFR usually uses single filer status and only includes the basic standard deduction. It does not include any itemized deductions, business expenses or extra credits. This results in a much higher tax liability, resulting in you having a much higher tax debt. An SFR should be avoided at all costs, and this can easily be done by simply filing your taxes.
Filing Preserves Your Eligibility for Payment Options
The IRS has a number of relief programs to help those who are unable to pay their full tax debt, such as installment agreements or offers in compromise. However, these programs almost always require that all relevant tax returns have been filed. If you choose not to file, you are choosing to lock yourself out of these programs, denying yourself what could be your salvation. You should always file your taxes to ensure that all relief options will be available to you.
Filing Can Reduce Stress and Uncertainty
The unknown can be a scary thing. When you don’t file, you have no idea how much you actually owe the IRS. This can cause a huge amount of stress. It is better to file instead. This way you will know exactly how much you owe. You can then make financial decisions with this in mind, and even start working towards paying off your tax debt. Choosing not to file is choosing to ignore the problem entirely, which is never good for one’s mental health or happiness.
What to Do If You Can’t Pay Your Tax Bill
So, now that you know why you should file, what should you do once you’ve filed and can’t pay? Well, you should start working towards satisfying your tax debt. As mentioned, the IRS has a number of programs available to help and is willing to work with you. Often, it is best to hire professional tax relief services. These experts are experienced in negotiating with the IRS. In most cases, they will be able to get you the best deal possible, potentially saving you thousands of dollars.
