What If You Can’t Pay Your Tax Liability on Time?

Written by Nick Sarinelli, CPA, Partner of Nisivoccia LLP
This article appeared in OnSite, the Metropolitan Builders & Contractors Association of New Jersey Magazine. 


Don’t let your inability to pay your tax liability keep you from filing your tax return properly and on time. As discussed below, just by filing your return you can save substantial amounts in filing penalties. More importantly, procedures exist for payment extension and installment payment arrangements which will keep IRS from instituting its collection process (liens, property seizures, etc.).

Many taxpayers hide their heads in the sand when they run into financial difficulties, for example, by failing to file their tax returns. But tax liabilities do not go away if left unaddressed. It is very important that you file a properly prepared return even if full payment cannot be made.  The “failure to file” penalty accrues at the rate of 5% per month on the amount of your unpaid tax.  The “failure to pay” penalty is gentler, accruing at the rate of only ½% per month on the amount of your unpaid tax.   If both penalties apply, the maximum combined penalty for the first five months is 25%. Thereafter the failure to pay penalty can continue at 1/2% per month for 45 more months for an additional 22.5%. Thus, the combined penalties can reach a total of 47.5% over time. Both of these penalties are in addition to interest you will be charged for late payment.

If you can’t pay your taxes, an extension of time for payment may be available if you can show payment would cause “undue hardship.” You will avoid the failure to pay penalty if an extension is granted, but you will still be charged interest. To get a hardship extension you would have to show that you do not have enough net assets to meet your tax obligations. You would also have to show you cannot borrow the amount needed except on terms that would inflict serious loss and hardship.

Another way to defer your tax payments is to request an installment payment agreement, which generally can be as long as 72 months. If your request to pay in installments is granted, the late payment penalty will be half the usual rate (1/4% instead of 1/2%), if you file your return on time.

Be aware that the IRS may terminate an installment agreement if the information you provided to IRS in applying for the agreement proves inaccurate or incomplete or the IRS believes collection of the tax involved is in jeopardy. The IRS may modify or terminate an installment agreement if any of the following occur:

  • you miss an installment.
  • you fail to pay another tax liability when it’s due.
  • you fail to provide an update of your financial condition where IRS makes a reasonable request for you to do so.
  • IRS determines that your financial condition has significantly changed.

In summary, if you feel you cannot pay your taxes on time, you should still timely file your tax return and include as large a partial payment as you can with the return.  Then start working with the IRS for a hardship extension or installment agreement. The alternative will include escalating penalties, plus the risk of having liens assessed against your assets and income.


Please contact Nick Sarinelli, CPA on 973.298.8500 if you have questions or to discuss this topic further.