Tax day is fast approaching. Your return needs to be in by April 15 (except in Maine and Massachusetts), so if you haven't started your paperwork, time is running out.

Unfortunately, when you do sit down to fill out those tax forms, you may face an upsetting reality: You may owe taxes that you can't afford to pay. If you find yourself in this situation, it may be tempting to stick your head in the hand and simply not file a return right away. Unfortunately, by taking this approach, you'll put yourself in a much worse financial situation. Instead, you should absolutely file on time, even if you're not able to pay what you owe right away.

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Why file your tax return if you can't pay?

Letting the Internal Revenue Service (IRS) know you owe the government money you can't send may seem like you're asking for trouble, but in reality it significantly reduces the penalties you could owe.

If you fail to file a tax return, the penalty you'll have to pay equals 5% of the outstanding tax balance for each part of a month you're late. The maximum penalty is 25% of the unpaid tax bill. But, if you're more than 60 days late, the minimum penalty equals the lesser of $205 or 100% of the unpaid tax balance.

If you file your return on time but fail to pay, you'll owe a failure-to-pay penalty of just 0.5% of the unpaid tax for each part of a month you're late -- up to 25% of the unpaid balance. This is obviously a significantly smaller potential penalty, so you're far better off simply filing, paying what you can, and figuring out the rest later.

What about requesting an extension?

If you can't pay your taxes by the April 15 deadline, requesting an extension may seem like a viable solution. And you can request an extension to avoid the higher failure-to-file penalty.

You must request the extension to file by tax day, and will need to submit your returns by October. So, for tax year 2018, you'd need to submit your extension request by April 15, 2019 and submit your forms by October 15, 2019.

Requesting an extension allows you to avoid that expensive 5% failure-to-file penalty, but it won't affect your failure-to-pay penalty. You'll still owe that, plus interest on the unpaid tax balance, unless you pay at least 90% of your taxes by the April deadline. If you've requested a tax extension on time and you paid in 90% of what you owe, you won't have to pay a penalty.

What should you do if you can't pay your taxes?

If you can't pay your taxes, there are a few possible solutions to consider:

  • Pay them on a credit card: You'll have to use a third-party processor (the IRS has a list of them) and pay a fee, which starts at 1.87%. Your credit card interest rate may also be higher than penalties you'd end up owing the IRS. However, if you have a cash-back card with a 0% promotional APR, the rewards could offset at least part of the fee, and the 0% APR could allow you to avoid paying interest for a while. Under these circumstances, this may be a cheaper approach.
  • Get a personal loan: If you owe a lot of money and want to be able to pay it off over time, a personal loan may be the answer. Many personal loans have repayment terms from three to five years, making it more affordable to pay off a huge tax bill. The interest rate on a personal loan is also usually lower than the rate you'd pay on a credit card. But you'll need to compare the total interest cost of the loan to what you'd pay the IRS in penalties and interest.
  • Look into IRS payment plans: The IRS offers a number of payment-plan options, including short-term payoff plans, as well as installment agreements if it will take you more than 120 days to pay the balance due. Longer-term plans have setup fees that may be waived if you have a low income. Penalties and fees are still owed, and you must be approved for a payment plan.
  • Pay in installments: If you don't qualify for a payment plan, you still have the option to pay in installments. You'll need to file IRS Form 9465 with your tax return to request an installment agreement.

It's important to consider the costs and benefits of each approach and find the most affordable one. But, whatever you do, even if you can't pay, make sure you get your tax return in on time!

Don't get hit with big IRS penalties

Filing your taxes by the April 15 deadline is one of the single most important things you can do to avoid owing huge penalties to the IRS. Remember, even if you can't pay the bill, it's better to let the IRS know that you owe, because otherwise the tax collectors could come after your money with a vengeance.