Should I file my tax return if I can’t pay the taxes that I owe?

If you are self-employed or have 1099 income you may owe taxes to the IRS this year.  But what are you supposed to do if you can’t pay those taxes when they are due?  Should you still file that tax return?  The answer to this question is an emphatic “YES!”

The IRS imposes different penalties for failing to file your tax returns, failing to pay your tax when due, and interest on unpaid taxes.  The IRS imposes a 5% per month penalty for failing to file tax returns when due.  (This penalty caps at 25% of the tax owed).  Separate from this penalty is a 0.5% per month penalty for failing to pay taxes owed.  (This penalty caps at 25% of the tax owed).  In addition the IRS charges interest on unpaid taxes.  (Currently this is approximately 3% per year).  NOTE: You can request an extension of time to file to October 15!

Not only is it very expensive to not file your tax returns, but failing to file tax returns on time can jeopardize your ability to ever have those taxes wiped out in a bankruptcy.  Most people don’t know it, but old income taxes can be discharged (wiped out) in a bankruptcy.  There is a five part test for determining if an income tax can be wiped out, and one of the tests is if the return had been filed at least two years before any bankruptcy.  If you don’t file your tax returns you cannot start that two year clock and may find out down the road that you cannot wipe out old income taxes because you didn’t file on time.

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