Owing taxes to the IRS is a serious matter that must be resolved as soon as possible to avoid unpleasant consequences and unnecessary stress. Once you’ve realized that you owe a hefty tax bill, you must be proactive about the situation, especially if you find yourself unable to pay in full right away. Whether you are short on money due to an emergency or some significant life event, you need to know what to do next and what mistakes to avoid.
Before we go into details about what to do if you owe taxes, let’s look at some common mistakes taxpayers make.
Many taxpayers tend not to file a return if they are not able to pay the amount they owe. Such a strategy only makes the situation worse as you begin to accumulate even more debt due to interest and penalties. The IRS charges a 5% penalty for not filing, which could go up to 25%. On top of the penalty, you will also accrue interest on your tax bill until it’s paid off.
If you need more time to complete your return, the best thing to do is to file for an extension which will give you six more months. You can even avoid the failure-to-file penalty by submitting your extension request before the April 15. However, a failure-to-pay penalty of 0.5% will be added to your bill.
The IRS offers a variety of payment plans for those who can’t pay their balance in full. Try to learn about different options and find out which installment plan you can qualify for.
Taxpayers with $50,000 or less in tax debt may check their eligibility and enroll in payment plans online. Those who prefer the traditional route may fill out Form 9465, Installment Agreement Request, and mail it to their local IRS office.
If you qualify, you will have up to 72 months to take care of your tax bill. Interest and penalties will keep accruing until the bill is paid off completely. Any tax refunds in the following years may be applied toward your balance.
Besides generating penalties and interest, issues with the IRS could have other consequences as well. For example, your travel plans could be ruined due to passport suspension. In attempts to collect the debt, the IRS could also place a lien on your property or start garnishing your wages.
When you don’t have enough resources in your bank account to pay your taxes in full, you may consider paying with a credit card or taking out a personal or home equity loan. However, don’t make a rush decision and take time reviewing your options and comparing interest rates, fees, and borrowing terms.
Now that you’ve learned about what not to do, let’s review the steps to take once you’ve realized that you might owe taxes at the end of the year:
After going through these steps, you will be better prepared and have a good idea how much you owe in taxes. Most importantly, you will have filed your tax returns as soon as possible to avoid serious consequences.
If you e-file your taxes on some online platform, you can usually pay electronically during your e-filing process. To minimize the failure-to-pay penalty, it is best to pay as much as you can manage. In case you are not able to pay in full or can’t pay anything, apply for an installment plan with the IRS.
To avoid or minimize your tax debt at the end of the year, consider the following strategies:
Regardless of how much you owe in taxes, it will be helpful to explore various options for obtaining money to pay your debt. Consider the following ideas:
Although many people are apprehensive about the taxpaying process, being informed and well versed in tax terminology and rules could help you resolve even complex tax situations with more ease and confidence. However, if you feel overwhelmed with tax debt, consider reaching out to professionals at Solvable. Our tax debt specialists will help you find the right solution and make sure you have the tools for staying debt-free in the future.