Be proactive about addressing financial shortfalls and tax debts.
No one wants to owe the IRS or state on their taxes each year, but it happens. After getting over the initial shock of how much you owe, the next step may be wondering how you’re going to pay for it.
Many people wonder the same thing. According to the IRS, there were over 8 million delinquent taxpayers at the end of 2020. Also, the IRS noted in a 2019 report that the national tax gap, the difference between tax owed and tax paid, was $441 billion between 2011 and 2013 (the most recent years analyzed by the tax agency). The same report also shows the IRS was able to recover $60 million of this tax debt but is still struggling to get the rest of what is owed.
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1. File your tax return regardless of whether you can pay or not
You’ll see how much you owe when you calculate your taxes or have your tax professional do it. At that point, you haven’t filed or e-filed your tax return yet. When you see the amount owed and know you don’t have the funds to cover it, your first reaction may be not to file your taxes yet.
That’s the worst decision you can make, however. Not only will you owe money to the IRS for those taxes, but you may also have to pay a failure-to-file penalty. This penalty can be as much as five percent of your unpaid tax bill owed for each month you go past the usual April 15th deadline (April 18th for the 2021 tax year). This penalty tops out at 25 percent of what you owe on your taxes for that year.
In contrast, if you go ahead and file your taxes but don’t pay, the penalty is a fraction of that. The IRS will tack on half a percent of what you owe for each month you don’t pay your tax bill in full.
2. Pay as much as you can
When it comes to the IRS, paying something is better than paying nothing. Consider using your savings, home equity, or credit cards to make some kind of payment. It should help you reduce tax debt and penalties at a faster rate.
Determine what you think you can pay that doesn’t create a bigger burden on yourself and your family. This is important when deciding your next plan of action, which is going to the IRS to negotiate an installment plan.
3. Request an IRS installment plan and create a payback plan
Many people don’t know this, but the IRS offers payment options if you request them.
First, there’s a full-payment agreement if you know you can pay your entire tax bill within 120 days of the April 15 due date. You’ll still have to pay interest and penalties but there won’t be any other fees tacked on with this agreement.
Second, if your tax bill is quite large, consider an IRS installment agreement. You’ll have more than 120 days to pay your tax debt, but you’ll also have to pay application fees for this repayment plan.
There are a couple of other key requirements. You have to file your taxes first. Also, you’ll be held liable to the payment arrangement you’ve agreed to. If you don’t uphold the payment agreement, the IRS may file a federal tax lien against your home or property.
Third, there’s another option called Offer in Compromise.
4. Make an Offer in Compromise
An Offer in Compromise (OIC) is a way to pay less than the tax you owe. Typically, an OIC is for people who have a tax debt of $50,000 or larger.
However, this payment arrangement has other requirements beyond just a large tax bill. You must prove there’s a serious financial hardship stopping you from paying off the debt. The IRS will examine your asset equity, income, and expenses to see if you truly have this hardship.
In some cases, the feds may also temporarily delay collection until your financial situation changes.
If you are considering this type of negotiation, be wary of organizations that claim they can help you slash your tax debt. None of these groups should promise what they can’t necessarily deliver. Do your due diligence before approaching any of these organizations.
Instead, seek out a tax professional who can help you apply for an OIC. You can also use the IRS Pre-Qualifier online tool to get started or see if you even qualify.
5. Make changes that will lower your tax burden in the future
It’s intimidating to know you owe money right now. But, there are solutions for that debt and stress.
Look ahead at how you can address future tax bills that you’ll have to pay. Perhaps you need to adjust how much you withhold from your paychecks, or how much you pay for your estimated taxes.
Can you make changes to your budget and spending so you have better cash flow? If you have more available money, you can potentially pay down future installment plans earlier. You also may not have to worry about where the money is coming from to pay your next tax bill.
Finally, get assistance from a tax professional or financial advisor on effectively planning for future tax burdens. Maybe you can start a retirement account that can lead to deductions that lower how much you end up paying. When you improve your financial planning, you’ll put yourself in a position that lessens the worry and stress associated with tax time.
Published by Debt.com, LLC