You’ve done your taxes and the worst is over … until you realize you owe the IRS.
Noooooo you think, as you cry into your drink.
If you’ve always got a refund like clockwork and suddenly owe the IRS, it can feel like a big blow to your finances. But owing the tax man some money isn’t the worst thing in the world and there are steps you can take to deal with the bill.
Pay your tax bill in full
The first, most obvious option is to pay your tax bill in full and move on with your life. The IRS accepts a variety of payment options, including:
- Electronic withdrawal
- Check or money order
- Cash at a retail partner
- Same-day wire
- Debit or credit card
It’s important to note that if you pay via debit or credit card, there are fees associated with your payment (and, of course, if you don’t pay your credit card bill in full, you’ll pay interest as well).
This tax season, I owed a sizable amount to the IRS — and it hurt, a lot. Luckily, I had the cash available to hand over to Uncle Sam and pay my other bills, too. Paying your tax bill in full is the best option if you have the cash on hand to do it. However, make sure you won’t run into a cash flow issue when it comes time to pay your other bills.
Request an IRS payment plan
If you can’t afford to pay your tax bill, don’t panic. There are options out there, but make sure you understand what they are and create a plan ASAP.
“If you owe Uncle Sam money, you can apply for an installment agreement request for your tax return or use the online payment agreement tool. I recommend contacting the IRS right away and talk about your options,” said tax lawyer and personal finance expert David Hryck.
There is an IRS payment plan available, which is an installment plan that offers monthly payments for taxpayers who owe taxes but can’t afford to pay them. If you’d like an IRS payment plan, you must apply online or by submitting Form 9465.
You can set up a payment plan with the IRS by requesting a short-term payment plan of 120 days. If you need longer than that, you can request a longer payment plan, but it will cost you $120. You can reduce your fee to $52 if you opt for direct debit.
If you can pay your balance within 120 days, you do not need to file Form 9465. Instead, you should call 1-800-829-1040.
In addition to an IRS payment plan, you might be eligible for an Offer in Compromise. With this option, you and the IRS agree to settle your tax debt for less than you actually owe due to financial hardship.
In order to be eligible for this option, the IRS will assess your income, expenses, ability to pay, etc. There is a non-refundable $186 fee to go this route and it could be a lengthy, difficult process.
“I have never heard of anyone doing this successfully without the help of a very experienced CPA, EA, or most of the time, a tax attorney. It is a long process (usually, at least eight to 10 months), but most of the time the IRS will agree to stop any collection activities while the application is being processed,” said Anil Melwani, CPA at 212 Tax & Accounting Service.
For more information on how to pursue this option, check out this nifty Offer in Compromise Booklet.
Need more time? File an extension
If you’re going to miss the tax deadline this year, make sure you file an extension ASAP.
“If you cannot file by April 15th [or April 18 in 2016], fill out Form 4868 as soon as possible. The extension will automatically extend your deadline to file by six months. I recommend using an e-file system to speed up this process and make it as timely and efficient as possible,” recommended Hryck.
If you don’t file an extension or don’t file on time, you will likely pay a late filing penalty. There is also a late payment penalty if you don’t apply for a plan on time.
“There is a failure to file penalty equal to five percent of any unpaid taxes due for up to five months,” said tax attorney Stephan M. Brown. “Additionally, there is a failure to pay penalty equal to 0.05 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid — up to 25 percent of your outstanding tax bill.”
If you owe the IRS, the key is to act fast. Even if you owe and can’t pay right away, at least file your return. Failing to file could lead to an increase in penalties and fees.
There are numerous options available if you owe the IRS, but it’s important to take action right away. Make sure to fill out any applications or forms related to payment, an installment plan, or an extension and understand any fees and deadlines associated with it.
To avoid this situation in the future, consider changing your tax withholding. If you’re self-employed, make sure you are properly estimating your quarterly taxes. For further clarification, discuss your situation with a tax professional.
While taxes are already tough enough, don’t make it harder by avoiding them if you owe. Use these tips to take matters into your own hands. You got this.