It sounds like a nightmare: you go to file your taxes and instead of getting a refund, you owe money to the IRS. What makes that nightmare even worse? If you can’t afford to pay your tax bill in full.
People are terrified of owing the IRS money, so much so that we’d rather overpay by thousands of dollars (the average tax refund in 2015 was over $3,000). But underpaying your taxes still happens, and it can happen for a lot of reasons. Here are just a few:
Not withholding enough from your paycheck
Receiving extra income (like selling stock or dividends) not subject to withholding
Self-employment tax or not paying quarterly estimated taxes
Major change in your tax return (such as no longer being able to claim a dependent)
No matter how you ended up owing taxes, you have to pay the IRS, and if you can’t afford to pay the IRS, you may start panicking. But don’t panic. Most times, when people panic, they just decide to avoid the IRS and end up getting into more trouble.
Instead of panicking, follow these steps:
1. File your taxes
If I owed money to the IRS, I would probably freak out and think that if I just avoided filing my taxes, the government would never know that I owe them money and I could just move on with my life. Unfortunately, that is very, very wrong. Turns out, the government already knows exactly how much you owe them, and you’re only hurting yourself by not filing on time.
If you don’t file on time, the IRS charges a failure to file penalty which usually equals 5% of your unpaid taxes for each month your return is late. This fee is way more than the fee the IRS will charge you for not paying your taxes in full, and as long as you file on time and follow their rules, the IRS will work with you.
2. Pay as much as you can
Owe $1,500 but can only pay $1,000? Pay that $1,000 when you file your taxes. That leaves only $500 that is subject to penalties and interest. While some online tax preparers, like TurboTax, will charge you the full amount if you pay by credit card or your bank account, you can always choose to send in a partial check by mail.
3. Consider using debt to pay off the IRS
If you owe a small amount, you may be able to charge what you owe the IRS to a credit card or take out a small loan. Depending on your credit score, the interest or fees charged by the credit card company or bank may be less than what the IRS would charge you. In general, financial experts are wary of using debt to pay off debt, but if you don’t owe much and you can get a credit card with no-interest for a few months, that may be a better option than working with the IRS.
Learn more about paying taxes with a credit card.
4. Ask for an Installment Agreement
You can pay off your taxes in monthly installments — for a price. It costs $105 to make an installment agreement with the IRS, though you only have to pay $52 if you agree to have your monthly payment directly debited from your account. Interest and a failure-to-pay penalty will also be added to your balance every month.
While you can choose your own monthly payment amount, it cannot be lower than your total bill divided by 72. If you choose an amount lower than that calculation, the IRS will take your total bill, divide it by 72, and set that as your minimum monthly payment. In general, it makes sense to pay as much as you can every month, though you may be better off choosing a low minimum payment and overpaying it. That way, if you have a tight month and can’t make your usual overpayment, you will not default on your installment agreement.
If you owe less than $50,000, you can apply for an online payment agreement.
If you owe more than that, you’ll need to file Form 9465 and Form 433-F to apply. You can also use Form 9465 if you owe less than $50,000 — in fact, you can slip that form in with the rest of your documents when you file for your taxes.
You can only apply for one installment agreement every five years, so make sure to keep track of your finances to avoid owing more taxes next year.
5. Ask for an Offer in Compromise
Really can’t pay your taxes? You may be able to negotiate an Offer in Compromise (OIC). If you’re qualified, you can settle with the IRS for an amount that is lower than what you owe. For an example, let’s say you owe $25,000, but you’re on disability. There’s no way you’d be able to pay that back in 72 payments. The IRS would rather collect some money from you than no money from you, so they might decide to compromise on a smaller amount.
Every situation is different, however, and the IRS rejects the majority of Offers in Compromise. You can use this OIC Pre-Qualifier tool from the IRS to check if you’re able to submit an OIC.
6. When in doubt, talk to the IRS
The IRS wants to help you, believe it or not. You can call the IRS at 800-829-1040 from 7 a.m. to 7 p.m. (your local time) from Monday to Friday. If you’d prefer to talk to someone in person, you can contact your local office and set up an appointment.
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