What happens if I cannot afford my tax liability?

Though a tax bill may be overwhelming, people in Washington do have options to make the situation doable.

For many people in Washington this year, filing income taxes means owing the U.S. government money. This happens for a few reasons. For example, someone may have had too little money withheld from a paycheck, collected unemployment, had an unexpected increase in income or failed to realize that gambling winnings count as income.

No matter the situation, it is difficult to find out that the Internal Revenue Service is expecting a chunk of change. For people who struggle to pay that bill, there are options.

The short-term extension

For some people, the issue of paying taxes is simply a matter of time. The deadline to file is April 15, and the IRS typically expects any money owed to be paid at that time. However, people who are unable to pay the amount in full may request for up to 120 days to satisfy the debt. The IRS states that there is no fee for this option, though it is possible that interest may accrue until the amount is paid in full.

The installment agreement

When those 120 days are not enough to pay the tax liability in full, an installment agreement may work. This allows people to send the IRS money in monthly installments, which could be in the form of payroll deductions, direct debits from a bank account or even placing a payment over the phone.

There is a fee to enter into an agreement, and that fee is based on which method of payment is used. However, people living in poverty may qualify for a lower fee.

The offer in compromise

An offer in compromise is ideal when neither the short-term extension nor the installment agreement fits the taxpayer's situation. This is an agreement with the IRS that reduces the amount of money that is owed. There are certain requirements that must be met for this option to be viable, such as the following:

  • The taxpayer must be current on all filings.
  • The taxpayer may not be in a bankruptcy proceeding.
  • Any estimated tax payments due must be satisfied.
  • It must be proven that payment in full is not possible or would create an economic hardship.

People who wish to pursue this option should note there is an application fee, though living in poverty could excuse someone from paying it.

Consequences of failing to pay

Failing to pay taxes could result in severe penalties. Initially, there are late fees and other penalties that may be assessed. The IRS may also take out a lien on the delinquent person's property and even seize assets.

In some cases, a criminal investigation into the situation may be launched, which could lead to jail time. For example, under the law, someone who willfully avoids paying taxes could be charged with a felony and sentenced for up to five years in jail.

It is best to address the issue with the IRS immediately. Anyone who has questions about this topic should speak to a tax attorney in Washington.