Are you asking yourself “what if I owe taxes and can’t pay?” You’re not alone. Each year, about one out of six people owe taxes when they file their tax return – and many of them can’t pay right away.
Many people ask themselves why they would file if I owe the IRS and can’t pay. After all, why create a tax bill? Because not filing only makes matters worse. Here’s why.
Four reasons you should file even if you can’t pay
1. You’ll owe more in the end, with penalties and interest.
If you don’t file your return on time and pay the tax you owe, the IRS will charge you (or, “assess”) a failure to file penalty that can add up to 25% more to your tax bill. On top of that, the IRS charges interest on the taxes and the penalties you owe.
2. The IRS can file a return for you.
The IRS can prepare a return for you, called a substitute for return. But this return won’t be good for you. The IRS will prepare it with income information from your bank, employers, and other payers – and you won’t get any credits or deductions you’re entitled to. So it’s usually best to file your own return. Learn more about how to file back tax returns.
3. The IRS can hold future refunds.
You may be due refunds in future years. But not filing now can affect you for years to come. If you don’t file a return now, the IRS can hold your refund in the future, meaning your money will just be sitting with the IRS. If you want to start receiving refunds again (or use your refund to pay off the taxes you owe), you’ll need to file the back tax returns.
4. Willful nonfiling can be a criminal offense.
The IRS doesn’t prosecute many people each year for tax crimes. But there can be stiff penalties – including a 75% penalty for willingly and knowingly not filing a tax return. It’s called the fraudulent failure to file penalty. Remember: Notorious mobster, Al Capone wasn’t prosecuted for any of his violent crimes or even for filing an incorrect return; he was prosecuted for not filing a return at all.
The good news? The IRS will work with you if you owe.
Go ahead and file your return on time. The IRS offers several options for people who can’t pay their taxes by the due date. Examples are extensions of time to pay, monthly payment plans, and even programs for people in financial hardship situations.
A tax professional can help you determine which option is best for you, and even request the payment plan for you from the IRS. Learn more about what to do when you can’t pay your taxes.
Or, learn more about H&R Block’s Tax Audit & Notice Services.