Dealing with a tax bill you cannot pay

A tax bill that cannot be paid produces more panic than most debts, and the position is generally more manageable than it feels — provided it is addressed rather than avoided.

File anyway

The single most important point.

Filing penalties and payment penalties are separate in most systems.

Which means that not filing because you cannot pay adds a penalty for something you could have avoided entirely.

File on time, then deal with payment separately.

And filing establishes the actual amount owed, which is necessary before any arrangement can be made.

Contact them early

Where the outcome is determined.

Tax authorities in most countries offer time-to-pay arrangements, spreading the amount over a period.

These are considerably easier to arrange before the deadline than after enforcement has begun.

Many systems have online arrangements for smaller amounts that can be set up without speaking to anyone.

Larger amounts generally require a conversation about income, expenditure and assets.

Interest usually continues to accrue during an arrangement, and penalties may be suspended.

What they will ask

Preparation that helps.

Why you cannot pay.

Your income and essential expenditure.

Your assets, including savings and anything realisable.

Other debts and their status.

What you can pay now and monthly.

And when you expect the position to improve.

Having a realistic statement of income and expenditure prepared — free debt advice services provide standard formats — makes the conversation considerably easier and produces better arrangements.

Why tax debts are priority debts

The enforcement powers.

Tax authorities in most countries have powers that ordinary creditors do not, which may include taking money directly from bank accounts, deducting from wages or benefits, using enforcement agents to seize goods, and in serious cases insolvency proceedings.

Which is why debt advice frameworks classify tax as a priority debt to be paid ahead of credit cards and other unsecured borrowing, regardless of collection pressure from those creditors.

Paying a credit card while a tax debt escalates is a serious error.

Penalties and appeals

Which are sometimes reducible.

Penalties in most systems can be appealed where there is a reasonable excuse — serious illness, bereavement, a fire or flood, a failure of the authority's own systems, and similar circumstances.

What generally does not count: pressure of work, finding the system difficult, or relying on someone else to file.

Appeals have deadlines and require explanation with evidence.

And penalties for errors are graduated by behaviour, with unprompted disclosure producing substantially better outcomes than discovery.

If you have undeclared income

Where the position is better than people fear.

Most jurisdictions operate disclosure facilities allowing people to come forward voluntarily.

Voluntary disclosure generally results in lower penalties than discovery and removes the risk of more serious consequences.

Professional advice before disclosing is worthwhile, since how a disclosure is framed affects the outcome.

And the anxiety of an undisclosed position generally exceeds the consequence of resolving it, which is worth knowing.

Getting help

Free and paid.

Free debt advice services handle tax debts as they handle any other and will negotiate.

Tax charities exist in several countries providing free help to people on low incomes, including with disputes and appeals.

An accountant is worth paying for anything complex, particularly disclosures and enquiries.

And the tax authority's own helplines are generally more helpful than expected, particularly for people trying to resolve rather than avoid.

Preventing it next time

Structurally.

A separate tax account with a proportion of every payment transferred on the day it arrives, which is the single change that prevents this situation.

Calculating the proportion generously rather than tightly.

Accounting for payment-on-account systems where the first bill includes a payment towards the next year.

Filing early, which reveals the amount owed months before it is due.

Keeping records monthly.

And an accountant if the position is anything other than simple.

What not to do

The responses that make things worse.

Not filing.

Ignoring correspondence.

Borrowing at high rates to pay a tax bill, when an arrangement with the authority is generally cheaper.

Paying non-priority creditors first because they are more aggressive.

Spending money set aside for tax, which is the origin of most of these situations.

And assuming the problem will be overlooked, particularly given automatic reporting of platform and financial income in most jurisdictions.

General information only, not tax or financial advice. Contact your tax authority early and a free regulated debt advice service — tax debts are priority debts.