Credit Sesame discusses options if you cannot pay your taxes due for 2022.
Famously, the U.S. Treasury Department developed tax evasion charges against Al Capone after the federal government could not build a criminal case against him for murder and other crimes.
Capone was convicted of tax evasion in 1931. He served seven and a half years of an 11-year sentence, and paid court fines and $215,000 plus interest due on back taxes before being released from federal prison on Alcatraz Island in San Francisco.
This is unlikely to happen to most people who cannot pay their taxes in 2023. Few people are charged with tax evasion and the IRS offers multiple warnings and chances for payment. Still, the memory of Capone is an intimidating reminder.
Unable to pay your taxes
What if you are not trying to evade your taxes but can’t afford to pay them? Is that a crime? Yes, though it’s likely a civil case that will result in a notice that you must pay back your unpaid taxes, plus interest and penalties. Prison is unlikely, though legally you could be sent to prison for one year for every year you don’t file.
Not paying taxes you owe is a crime
Failing to file your taxes is against the law. Intentionally lying on a return or trying to deceive the IRS is tax fraud and you could be charged and convicted of tax evasion. The maximum penalty is imprisonment of up to five years and up to $100,000 in fines.
If you do not pay your taxes, you could also be charged with a crime, though the IRS first tries many methods to get the money that you owe from you.
What if you file a tax return this year and owe taxes but cannot afford to pay them? What can you do?
Don’t ignore IRS notifications
Firstly, do not ignore IRS communications. The IRS wants the money you owe, and ignoring its letters and not paying could lead to a court case against you.
It could place a lien on your property or assets, and eventually your property could be seized to pay your bill. Your wages could be garnished, or it may withdraw money from your bank accounts. An unpaid tax bill could also be deducted from any future tax refunds you’re owed.
Before the IRS takes legal action, it gives you several chances to pay. It first sends you a letter, giving you time to pay or to challenge the notice. The letter arrives via standard mail, never as a phone call or e-mail.
There’s a 10-year statute of limitations on the IRS to collect a liability from the date of assessment. After 10 years the IRS can no longer try and collect taxes you owe. However, there’s no statute of limitations on tax fraud, so if you intentionally try to defraud the IRS, you could still be charged with a crime at any date in the future.
Payment plans available if you cannot pay your taxes
The IRS has options if you can’t pay your taxes all at once. You may qualify for a self-service, online payment plan so you can pay off what you owe over time.
You get immediate notification of whether your payment plan has been approved without having to call or write the IRS. This option is quicker than asking for a payment plan when you file your tax returns electronically, even if the new tax hasn’t been assessed yet.
Payment plans include:
- Short-term plan of 120 days or less when the amount owed is less than $100,000 in combined tax, penalties and interest.
- Long-term plan of 120 days or longer, paid monthly when less than $50,000 is owed.
The option when owing $50,000 or less requires making an installment agreement request with Form 9465. The form asks about your income and expenses, such as how often you’re paid and what your take home pay is. Car payments, health insurance premiums and court-ordered payments are also taken into account. You can get up to six years to pay the plan off.
No setup fee is charged for the short-term plan, but the long-term payment plan through automatic transfers from a checking account requires a fee of $31 for applying online, or $107 when applying by phone, mail or in-person. Fees can be waived for low-income applicants. Payments made outside of direct deposit require paying fees of $130 online or $225 if filing by other methods.
If you miss a payment on the installment agreement, you owe the whole payment as a lump sum, and penalties and interest are also due immediately.
Extensions for filing late
Federal income taxes are due April 18, 2023. You can file a tax extension until Oct. 16 to file your federal return, but it only gives you more time to file a return, not pay taxes. If you owe money and want to avoid late fees and interest, then you need to estimate how much you owe and pay it by April 18.
IRS Form 4868 is used to ask for an extension to file, either electronically through your tax-filing service, or by physical mail. The extension is automatic as long as you ask for it by Tax Day. You don’t need to provide a reason for the extension request.
How much are the late fees and interest?
The penalties for not paying your taxes can add up to 25% of the taxed owed after the due date. The IRS list its failure-to-pay penalties as:
- 0.5% of the tax owed after the due date, for each month or part of a month the tax remains unpaid, up to 25%.
- 10 days after the IRS issues a final notice to levy or seize property, the 0.5% penalty increases to 1% per month.
- 0.25% for each month or part of a month for an installment agreement.
Those are penalties for not paying your taxes. The IRS has another list of penalties for not filing a tax return at all, either after the due date or an extended due date, unless a reasonable cause is accepted for filing late. The failure-to-file penalties are:
- 5% per month, up to 25% of unpaid taxes.
- Combined penalty for not filing or paying is 5%, up to 25% total.
- Failure-to-file penalty maxes out at five months, though the failure-to-pay penalty continues until the tax is paid, up to 25%.
- Maximum penalty for failure to file and pay is 47.5% of the tax.
- If return was more than 60 days late, minimum failure-to-file penalty is $450 or 100% of the tax required to be shown on the return, whichever is smaller.
The fees listed above are basically late fees for not paying your taxes. The IRS also charges interest on the unpaid balance. At the start of 2023, it charges 7% for underpayments, meaning taxes owed but not fully paid.
Other consequences if you cannot pay our taxes
If you don’t pay taxes, the IRS may summon you to a local post office to confirm your information with tax documentation and to file a tax return in person.
If you owe $59,000 or more, you cannot get a passport or renew one through the United States.
The IRS may transfer your account to private collections, and a collection agency may start asking you for payment.
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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for formal professional advice.
