The Problem With Not Filing
It's tempting to try to fly under the radar of the IRS, but it hardly ever actually works. The government receives tax reporting forms from a number of sources, including employers, financial institutions, and other entities that pay you even modest amounts of money for a wide variety of purposes. When you don't file a return, those tax-reporting forms create red flags because of the mismatch compared to your failure to report any income.
Moreover, the costs can be huge if you ignore the problem. Every month you go without filing a return, you'll incur a 5 percent penalty on the tax that you owe, up to a maximum of 25 percent. Failing to pay adds smaller penalties of half a percent a month, which over time can as much as double the maximum penalty owed. You'll also owe interest on unpaid amounts dating from the time when you should have filed your return and paid your taxes.
What the IRS Can Do
In the past, most people saw the IRS as a ruthless government equivalent of a collection agency, wielding tax liens and wage garnishments as tools for collecting back taxes mercilessly. Over the past several years, though, the IRS Fresh Start initiative has centered on helping to encourage compliance by recognizing the need for financial assistance and finding the best balance between being fair and being realistic about the government's ability to collect tax.
What the IRS will do for you depends on the gravity of your financial situation. If all you need is some additional time but expect to be able to pay in full within a few months, you can request a short extension either by using the IRS online payment agreement application at irs.gov or by calling the IRS at 800-829-1040. Doing so can buy you up to 120 days to get your tax bill taken care of, and when you combine it with an automatic six-month extension to file your return, you can avoid the most onerous failure-to-file penalty. You'll still owe penalties and interest, and you'll have to pay the bill in full within the 120-day period, but the benefit of the short extension is that it's free.
If you'll need more than just a few months to repay the IRS, then you'll want to take a look at setting up an installment agreement. Those who owe $50,000 or less can apply using the online payment agreement application, or IRS Form 9465 is available for filing as well. Fees of $43 to $120 apply to the request. With monthly payments directly debited from your checking account, you can set up installment plans for up to 72 months. Even if you owe more than $50,000, installment agreements might be available, although you'll have to provide a special financial statement to the IRS for their review.
Finally, if you have no ability to pay your taxes in full, you can make what's known as an offer in compromise. This agreement allows you to settle your tax debt for less than the full amount. By looking at your assets and income, the IRS will determine whether it believes you could pay the full tax due or whether accepting the offer in compromise is the best way for it to get the most it can in taxes. To see if you're eligible, the IRS provides a pre-qualifying application that runs you through a number of eligibility-related questions.
No Free Lunch
Keep in mind that with all of these options, you'll end up having to pay additional amounts beyond the tax that you owe. In some cases, the interest and penalties you incur will make it smart to consider other sources of funds in order to get your taxes paid. Yet for those who don't have any good alternatives, turning to the IRS for help can actually be a lot less intimidating than you'd think.
Motley Fool contributor Dan Caplinger is fortunate enough to be able to pay his tax bill this year. You can follow him on Twitter @DanCaplinger or on Google Plus. Click here to check out our free report on one great stock to buy for 2015 and beyond.