Tax season can bring a mix of emotions, but few feelings are more stressful than realizing you can’t pay your tax bill. Whether it’s an unexpected liability from a side gig, a large bonus, or a financial hardship that’s left you short, not being able to pay your 2024 taxes in 2025 can feel overwhelming.
The good news? You have options. There are a variety of solutions to help taxpayers manage unpaid taxes without fear of aggressive collection actions—if you act quickly. Let’s explore common scenarios that lead to unpaid taxes and actionable steps to address the situation. To get help now, contact us at Wiggam Law today.
Key Tips for Avoiding Unexpected Tax Liabilities
- Set aside a portion of gains from selling investments or stocks.
- Make sure your withholdings are captured accurately at your job.
- Save the right amount if you have side gigs or are self-employed.
- File on time even if you cannot afford to pay – that reduces penalties.
- Contact the IRS right away if you are experiencing financial hardship.
Common Scenarios Leading to Unpaid Taxes
There are all kinds of situations that can lead to an unexpected tax liability when you file your taxes. If you prepare your 2024 tax return and see that you owe taxes, you should figure out why and take steps to avoid this next year when you file your 2025 return.
Here are some of the most common reasons that people owe taxes:
Not Withholding Enough Taxes
If you’re a W-2 employee, underestimating your withholding can leave you short at tax time. This issue is common with bonuses, large payouts, or changes in income that weren’t reflected on your W-4 form. It can also happen if you have a life change that reduces your tax liability, but you don’t update your W4 accordingly – for example, you no longer claim one or more of your dependents on your tax return.
- Solution: Update your W4 for 2025 so you don’t face this issue next year. Pay special attention to the section that lets you enter calculations for second jobs or side gigs.
Selling Stocks or Investments
Selling assets like stocks, real estate, or cryptocurrency can lead to significant capital gains taxes. If you’ve sold investments but didn’t set aside a portion of the proceeds for taxes, you might find yourself with a hefty tax bill. Understanding your capital gains liability ahead of time is essential to avoid surprises – be aware of the following:
- Short-term gains: Taxed at your ordinary income rate.
- Long-term gains: Taxed at a lower rate (0 to 20%), depending on your income.
- Planning ahead: Set aside a portion of proceeds for tax obligations.
Side Gigs and 1099 Income
Freelancers, gig workers, and self-employed individuals often struggle with unpaid taxes because their taxes aren’t automatically withheld from their paychecks like employed workers. On top of income tax, self-employment taxes (covering Social Security and Medicare) can significantly increase your liability.
- Solution: Plan ahead and save 25-30% of income for taxes. If you are also employed, consider increasing your withholding to cover the taxes you will owe on your side gig.
Unexpected Life Events
Life happens, and sometimes financial hardships such as medical emergencies, job loss, or unexpected expenses make paying taxes impossible, especially if you’re self-employed. These events can disrupt even the best-laid plans, leaving you struggling to meet your obligations.
- Solution: Don’t ignore your tax situation. Reach out to the IRS to learn about hardship options. If you can’t pay your 2024 taxes due in 2025, you may be able to get your account marked as temporarily uncollectible.
Mistakes in Tax Planning
Overlooking taxable income or deductions can also lead to an unexpected tax bill. For example, if you miss reporting income, the IRS will send you a notice and a bill after updating your tax return. If you fail to claim deductions, you will owe more than you should, and the IRS will not reach out to you about that error.
- Missed income: Ensure all 1099s and W-2s are reported.
- Check deductions: Charitable donations, medical expenses, business deductions, etc.
- Optimize credits: Talk with a tax pro if you’re unsure of which credits you may qualify for.
- Avoid errors: Use tax software or hire a professional.
Steps to Take If You Can’t Pay 2024 Taxes
When people cannot pay their taxes, they often want to ignore the situation. That can make matters worse, and eventually, nonpayment may put your wages and assets at risk. Consider the following tips:
File Your Return Anyway
Even if you can’t pay your tax bill, filing your return by the deadline is critical. Filing on time prevents failure-to-file penalties, which can add up quickly and worsen your financial situation.
The penalty for not filing is 5% of the balance due per month. In contrast, the penalty for not paying is just 0.5% per month. Say you owe $10,000 on your 2024 income tax return. If you don’t file by April 15, you will incur a penalty of $500 for failing to file each month you are late. If you file but don’t pay, the penalty is just $50 per month.
Assess Your Tax Liability
Review your tax return carefully to confirm the amount owed. Double-check for any errors or missed deductions that could reduce your liability. If you’re unsure, consider consulting a tax professional for assistance. They can ensure that you have maximized deductions and credits, and they can help you plan for next year.
Contact the IRS
Although it’s tempting, don’t ignore the problem. Reach out to the IRS as soon as possible to discuss your situation. Early communication can help you explore resolution options and avoid aggressive collection actions like liens or levies.
Options for Resolving Taxes Owed with the IRS
So, you’re looking at your 2024 return, and you’re wondering what happens if you file it but cannot pay. Whether you owe a few thousand, $50k to $100k, or any even larger amount, you have options:
Short-Term Payment Plans
If you can pay your balance in full within 180 days, a short-term payment plan might be your best option. These plans are simple to set up and help you avoid more costly long-term agreements. If you owe less than $100,000, you simply go online and tell the IRS that you’ll pay within 180 days. As long as you pay when promised, the IRS will not take any collection actions against you.
Long-Term Installment Agreements (IA)
The IRS offers monthly installment agreements for larger balances that can’t be paid quickly. While interest and penalties will continue to accrue, this option provides a manageable way to address your tax debt over time.
You can easily set up a payment plan online if you owe less than $50,000 and can pay off the balance in less than six years. If you owe more, need longer to pay, or have a history of defaulting on payment plans, you may still be able to make an arrangement, but you’ll need to work with the IRS and complete additional forms such as a 433-F.
Currently Not Collectible (CNC) Status
If you’re facing significant financial hardship, you might qualify for CNC status. This designation temporarily halts IRS collection efforts, giving you breathing room to stabilize your finances. Keep in mind interest will still accrue, and if your financial situation improves, the IRS may require you to pay in full or start making payments.
Offer in Compromise (OIC)
An OIC allows eligible taxpayers to settle their tax debt for less than the full amount owed. This option is designed for individuals who cannot pay their full liability and meet strict eligibility requirements. Compliance with current tax filings is essential to qualify, and after you get the settlement, you must stay compliant with tax filing and payment obligations for the next five years, or you may lose the settlement.
Steps to Minimize Penalties and Interest
Sometimes, you can reduce the amount owed after you file. Check out these ideas:
Requesting a Penalty Abatement
You may be eligible for first-time penalty abatement if you’re a first-time offender. You can also request penalty relief for reasonable cause, such as illness or financial hardship. Contact the IRS to see if you qualify.
Reducing Interest Charges
While interest cannot be waived, it stops accruing once your balance is paid in full. The sooner you resolve your debt, the less interest you’ll owe. Making partial payments also helps to reduce your total interest.
Amending Your Tax Return
If you’ve overlooked credits or deductions, amending your return can reduce your overall liability. Be sure to consult a tax professional to ensure accuracy.
Preventing Future Tax Issues
Facing a tax liability is never fun. Remember these tips so that when you file your 2025 tax return in 2026, you’re less likely to be faced with a bill.
Adjusting Withholdings
Review your W-4 form annually and after major life changes, such as getting married, having a child, or taking on a second job. Adjusting your withholding ensures you’re not underpaying throughout the year.
Making Estimated Tax Payments
If you have irregular income or are self-employed, making quarterly estimated payments is crucial. This helps you avoid underpayment penalties and reduces the risk of a large year-end tax bill.
Planning for Capital Gains and Windfalls
Consult a tax professional to strategize if you plan to sell investments or receive a large bonus. Setting aside funds in advance can help you cover any resulting tax liability. You may also benefit from certain strategies, such as contributing money to a tax-advantaged retirement account.
When to Seek Professional Help – Signs You Need Assistance
If you owe a large balance, feel overwhelmed, or receive threatening IRS notices, it’s time to seek professional help. Tax professionals can guide you through complex situations and negotiate with the IRS on your behalf.
From setting up payment plans to applying for CNC status or an OIC, a tax professional can ensure you’re taking the best approach to resolve your debt. They can also help you stay compliant and avoid future tax pitfalls.
Tax Bill FAQs
What happens if I can’t pay my taxes by the due date?
Failing to pay taxes on time results in penalties and interest. However, you can minimize these by filing your return on time and contacting the IRS to set up a payment plan.
How do I qualify for an IRS payment plan?
Eligibility depends on your tax balance and ability to pay. There is guaranteed acceptance for taxpayers who owe less than $10,000, can pay off the balance within three years, and have a history of compliance. There is also relatively easy acceptance for anyone who owes less than $50,000, can pay it off within six years, and has a history of compliance.
Outside of that, you may qualify, but you must submit extra financial paperwork and negotiate an agreement based on your ability to repay the IRS.
Can the IRS take my assets if I don’t pay?
Yes, the IRS can place liens on your property, seize your bank account, or garnish your wages if your tax debt remains unresolved. However, proactive communication with the IRS can help you avoid these actions.
What penalties apply if I don’t pay my taxes on time?
Penalties include a failure-to-pay penalty (0.5% of the unpaid balance per month) and interest on the outstanding amount. Filing on time can reduce additional penalties.
Can I settle my tax debt for less than I owe?
An Offer in Compromise (OIC) allows eligible taxpayers to settle for less. Qualification depends on your financial situation and compliance with tax filings.
In some situations, you can also have your income tax liability written off by filing for bankruptcy.
What options are available for people in financial hardship?
Options include Currently Not Collectible (CNC) status, payment plans, or an OIC. Consulting a tax professional can help you determine the best course of action.
Contact the Tax Professionals
Unpaid taxes can feel like a heavy burden, but you don’t have to face them alone. The IRS offers several options to help you resolve your debt and minimize penalties. Take immediate action by filing your return, assessing your liability, and exploring resolution methods.
For expert assistance in managing unpaid taxes, minimizing penalties, and navigating the IRS process, contact Wiggam Law today. Together, we can help you find a path to financial stability. For further guidance, call us at (404) 233-9800 or use our contact form to request a consultation.