Many people will efile their personal income taxes this year and unfortunately, find out they owe the IRS. Some may even know well in advance they’re going to owe.
So, what do you do if you owe the IRS money? Certainly, don’t panic. The important thing to do is to stay level headed. There are plenty of options you can consider in making sure the IRS gets their money. But you’ll want to act fast to get your plan in order and rid yourself of the debt as soon as possible.
What to do if you know you’re going to owe money to the IRS
Avoid tax penalties
First, don’t hesitate to file. Even if you know you’re going to owe income taxes this year, you’ll want to go ahead and file by April 15th. According to an article at SmartMoney.com, you’ll have to pay a 5% per month penalty. The failure to file penalty will be charged until it reaches 25% or more of what you owe! SmartMoney provides the below example:
If your unpaid balance on April 15 is $8,000, you’ll rack up monthly failure-to-file penalties of $400 until you “max out” at $2,000. After that, you’ll be charged interest until you settle your account (as mentioned, the current monthly rate is 0.833%).
You might consider filing an extension using form 4868, but keep in mind, an extension of time to file is not an extension of time to pay. Penalties and interest will still accumulate on your debt. According to the IRS, interest is generally 1/2 % to 1% for each month or part of the month the tax is not paid.
Options if you can’t pay your income taxes
Bottom line, if you can’t pay your income taxes, it’s time to explore your options. Keep in mind, owing the IRS is a form of debt. You’ll want to take action to get the IRS paid off fast! Here are some ideas to consider in no specific order.
Can you draw on your personal savings to pay the tax bill? An unexpected tax bill is reason enough to pull money from your emergency savings fund and pay it off immediately. However, I wouldn’t recommend leaving less than $1000 in your savings account. If you’re already under this amount, you might consider some of the other options listed or even an installment agreement discussed below.
2. Sell something
While it may be hard to part with something you value, it may be a good idea to sell a more expensive car or recreational item such as a boat or motorcycle to pay off your debt. Remember, being in debt is serious, especially when you owe the IRS. Don’t play games.
3. Pay some of the debt
You may not be able to pay the entire balance in full, but pay what you can since what you owe is subject to interest. Again, if you set up an installment or payment agreement the government will charge you between 1/2 % to 1% for each month or part of the month the tax is not paid.
4. Offer in Compromise
An offer in compromise (OIC) is an agreement between you and the IRS that settles your tax liabilities for less than the full amount owed. Keep in mind, an offer in compromise is generally not accepted if the IRS believes the liability can be paid in full or through a payment agreement.
5. Family and friends
While this may not work some people, others may be able to ask family or friends to help get them over this hump in the road. My personal recommendation here is to pay family and friends back as soon as possible and never ask for the loan without a sure way to repay or ability to make payments each month.
6. Other loans
Taking out another loan to pay the IRS would be a last resort option in my opinion. You probably won’t be able to beat the interest rate the IRS offers with a personal loan from your bank, or even a home equity loan. And I certainly wouldn’t use a credit card if that’s something you’re thinking about. Still, having all the options on the table for consideration will help you choose the right approach for your situation.
7. Installment or payment agreement
What is an installment agreement? An installment or payment agreement is an agreement with the IRS to pay your taxes in payments over time.
How do you set up an installment agreement to pay your income taxes?
If you have $25,000 or less in combined tax, penalties, and interest you are eligible to request an installment payment plan. According to the IRS, you can call the number on your tax bill or use the Online Payment Agreement (OPA). You can also complete a fill-in request by using form 9465.
Once you submit the request, you will receive a written notification telling you whether or not the terms of your installment agreement have been accepted, or if some modification is necessary. According to SmartMoney you can submit your own terms and the approval is generally automatic if you owe $25,000 or less.
What if you owe more than $25,000? According to the IRS, you may still be eligible. But, you’ll need to also complete form 433F.
Will you still get tax refunds if you have an installment agreement?
As a side note, any refund due to you in a future year will be applied to the amount you owe. The IRS automatically applies the refund to the taxes owed. If the amount of your refund doesn’t pay off the tax debt, your installment agreement will continue until the terms are met.
Quite often I’ve heard Dave Ramsey mention you don’t want to owe the IRS. Get them paid off as soon as possible so that you can get on with your life! If you move to an installment agreement, do what you can to pay extra payments each month to minimize interest charges. Also, after figuring out your approach to pay, make sure you plan appropriately for the current tax year. The last thing you want to do is increase your debt by owing more when you file taxes again next year. If you’re having trouble planning, consider finding a tax professional or CPA to help. Work with this person to minimize a tax refund as well as owing any money.
What do you think about these options?
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