Can’t Pay Your Tax Bill? File the Return Anyway.
You finished your tax return and the number at the bottom is not good.
Maybe you owe $8,000. Maybe it is $40,000. Maybe you are self-employed and had a much better year than expected—but did not make enough estimated payments along the way.
Whatever the reason, you do not have the money to pay the entire bill.
So a very understandable thought pops into your head:
Why should I file the return if I can’t pay what I owe?
Because filing late and paying late are two different problems.
And creating a failure-to-file problem because you already have a failure-to-pay problem can make an unpleasant tax situation considerably more expensive.
The IRS itself tells taxpayers to file required returns even when they cannot pay the balance in full.
Here is why.
Failure to File and Failure to Pay Are Not the Same Thing
When you owe federal income tax, there are two separate deadlines you need to think about:
Filing the return.
And:
Paying the tax.
Miss the filing deadline when you owe tax, and the IRS can assess a failure-to-file penalty.
File the return but do not pay the balance by the deadline, and you can face a failure-to-pay penalty.
If you do neither, both penalties may apply.
And there is an important difference between them.
The federal failure-to-file penalty is generally 5% of the unpaid tax for each month or part of a month that the return is late, up to 25%.
The ordinary federal failure-to-pay penalty is generally 0.5% of the unpaid tax per month or part of a month, also generally up to 25%.
When both penalties apply during the same month, the IRS generally reduces the failure-to-file penalty by the failure-to-pay penalty for that month.
In plain English?
Not filing can get expensive much faster than filing and simply owing money.
That is why hiding the return in a drawer until you can afford the tax is usually not a good strategy.
“But Filing Means the IRS Will Know I Owe the Money.”
Yes.
And I understand why that can feel scary.
Filing a return showing a large balance can feel a little like voluntarily sending someone a bill you cannot afford.
But avoiding the return does not make the underlying tax disappear.
Instead, you may end up with an unpaid tax problem and an unfiled-return problem.
If the return is already late, waiting longer generally does not improve the situation. The IRS recommends filing past-due returns regardless of whether you can pay the full amount due.
Getting the return filed lets you move on to the next question:
How are we going to deal with the balance?
That is a problem with potential solutions.
File First. Then Figure Out How to Pay.
There is a big difference between:
“I cannot pay the IRS today.”
and:
“There is nothing I can do.”
Those statements are not the same.
Depending on the amount you owe and your financial circumstances, the IRS has several ways taxpayers may address balances they cannot immediately pay in full.
For example, some taxpayers may qualify for additional time to pay or an installment agreement that spreads the balance over monthly payments. If someone is experiencing genuine financial hardship, other collection alternatives may also need to be considered.
The right answer depends on the person.
Someone who owes $10,000 and has reliable income is in a very different position from someone who owes $150,000, has a struggling business, and cannot cover normal household expenses.
But you cannot make a sensible resolution plan until you know what the actual tax liability is.
That starts with filing accurate returns.
Pay What You Can
Filing does not mean you must magically come up with every dollar at once.
If you can pay part of the balance, paying something can reduce the amount on which additional penalties and interest continue to accrue.
The IRS specifically advises taxpayers who cannot pay in full to file and pay as much as they can.
That might mean paying most of the bill.
It might mean paying a small portion.
Or your financial situation may require a different strategy entirely.
The important point is that “I can’t pay everything” should not automatically become “I’m going to do nothing.”
Those are very different decisions.
What About Massachusetts?
Massachusetts taxpayers have another layer to think about.
You may owe the IRS and the Massachusetts Department of Revenue.
Massachusetts also distinguishes between failing to file a return on time and failing to pay tax on time.
For Massachusetts taxes, the late-filing penalty is generally 1% of the unpaid tax per month or fraction of a month, up to 25%. The late-payment penalty is also generally 1% per month or fraction of a month, up to 25%. Interest can also accrue.
So ignoring a Massachusetts return because you cannot afford the balance can create the same basic problem:
You are turning one issue into two.
Massachusetts DOR also offers payment agreements in appropriate situations, and taxpayers who can no longer make payments may be able to discuss financial hardship with DOR Collections.
The federal and Massachusetts balances should be looked at together.
You do not want to agree to an IRS payment that leaves you unable to address DOR—or vice versa.
An Extension to File Is Not an Extension to Pay
This catches people every year.
You file an extension and think:
“Great. I have until October.”
You may have additional time to file the return.
That does not necessarily give you additional time to pay the tax.
For federal individual income taxes, an extension of time to file generally does not extend the deadline for payment. Taxes owed are generally due by the original filing deadline.
Massachusetts likewise separates the return extension from the payment obligation. DOR states that interest applies to tax that was not paid by the original due date, even when the return itself is filed later.
So if your accountant filed an extension but you ultimately discover you owe a substantial balance, do not assume the extension eliminated all penalties and interest.
It may not have.
What If You’re Already a Few Years Behind?
This is where people tend to freeze.
Usually it did not start as a five-year tax problem.
It started as a one-year tax problem.
Maybe you were self-employed and your records were a mess.
Maybe a business failed.
Maybe you went through a divorce.
Maybe you knew you owed money and did not have it.
Maybe life simply got away from you.
Then the next year arrived.
And filing that return meant dealing with the return you had already missed.
So you put it off again.
One year became two. Two became four.
Now opening IRS mail makes your stomach hurt.
At this point, waiting until you can “fix everything” before taking the first step usually makes the problem harder.
The first job is figuring out which returns are missing, what the correct numbers are, and what you actually owe.
Then you can look at the larger resolution strategy.
You do not need to solve the entire problem before you are allowed to start solving it.
Can Failure-to-File or Failure-to-Pay Penalties Ever Be Removed?
Sometimes.
Penalty relief may be available depending on the taxpayer’s circumstances and compliance history.
The IRS has administrative penalty-relief procedures, and certain taxpayers may qualify for relief from failure-to-file or failure-to-pay penalties. Reasonable-cause relief may also be available where the facts show the taxpayer exercised ordinary business care and prudence but was nevertheless unable to comply.
Massachusetts also permits certain penalties to be waived or abated under appropriate circumstances.
But penalty relief is very fact-specific.
“I forgot” is different from being hospitalized.
A temporary cash-flow problem is different from a catastrophic business event.
Bad advice, missing records, family emergencies, serious illness, and other circumstances all need to be evaluated based on what actually happened.
And remember: getting a penalty removed does not necessarily eliminate the underlying tax.
That is why the entire account needs to be reviewed rather than focusing on one scary line of one notice.
Don’t Wait for the Perfect Moment
There is rarely a morning when someone wakes up excited to deal with an overdue tax return.
And waiting until you have enough money to pay everything can sound reasonable.
But if you owe $30,000 and cannot pay it today, delaying the return does not turn it into a $0 problem.
It can turn it into a bigger $30,000 problem.
File the return.
Pay what you reasonably can.
Then determine what options are available for the remainder.
That may involve a payment arrangement. It may involve examining hardship options. It may involve penalty relief. In some cases, there may be other collection alternatives worth evaluating.
The answer depends on your income, assets, expenses, tax history, total balance, and whether you are now staying current.
Already Behind? Start With the Actual Problem.
If you have unfiled tax returns or a balance you cannot afford to pay, you may be tempted to avoid dealing with either one.
That is understandable.
It is also usually expensive.
Laura Brown helps Massachusetts taxpayers untangle unfiled returns, IRS and Massachusetts DOR balances, penalties, notices, and collection problems.
No judgment.
The goal is to figure out where things stand, get you back into compliance, and build a realistic strategy for what comes next.
Contact Laura Brown to discuss your IRS or Massachusetts tax problem.
This article provides general information and is not legal or tax advice for any particular taxpayer.