First of All, Don’t Panic If You Owe Taxes!
At Precise Books & Tax Solutions, we understand the fear of not being able to pay what you owe when the IRS requests it, and we can help.
The vast majority of Americans get a tax refund from the IRS each spring, but what if you’re one of those who end up owing?
The IRS encourages you to pay the full amount of your tax liability on time by imposing significant penalties and interest on late payments if you don’t. So if you are unable to pay the tax you owe, it is generally in your best interest to make other arrangements to obtain the funds for paying your taxes rather than be subjected to the government’s penalties and interest.
Here are a few options to consider. Although they all have negative connotations, they are all better than the penalties and interest the IRS could impose, not to mention the time and headache of dealing with IRS communications and the possibility of wage, bank account, and asset levies.
So, let’s look at your tax payment options:
- Family Loan – Obtaining a loan from a relative or friend may be the best bet because this type of loan is generally the least costly in terms of interest.
- Credit Card – Another option is to pay by credit card with one of the service providers that work with the IRS. However, since the IRS will not pay the credit card discount fee, you will have to pay it and pay the higher credit card interest rates.
- Installment Agreement – If you owe the IRS $50,000 or less, you may qualify for a streamlined installment agreement where you can make monthly payments for up to six years.
- You’ll still be subject to the late payment penalty, but it will be reduced by half.
- Interest will also be charged at the current rate, and there is a user fee to set up the payment plan.
- In making the agreement, you will have to agree to keep all future years’ tax obligations current.
- If you don’t make your payments on time or have an outstanding past due amount in a future year, you will be in default of the agreement and the IRS has the option of taking enforcement actions to collect the entire amount owed.
- If you’ll be seeking an installment agreement exceeding $50,000, you’ll need to validate your financial condition and the need for an installment agreement by providing the IRS with a Collection Information Statement (financial statements). You may also pay down the balance due to $50,000 or less to take advantage of the streamlined option.
- Tap a Retirement Account – This is possibly the worst option for obtaining funds to pay your taxes because you are jeopardizing your retirement and the distributions are generally taxable at your highest bracket, which adds more taxes to your existing problem. In addition, if you are under age 59½, the withdrawal is also subject to a 10% early withdrawal penalty that compounds the problem even further.
If you find you cannot pay your taxes due, you should still file your tax return before the deadline. I know that’s days away, but it is a best practice.
If you would like to discuss your options or would like to make sure you pay enough taxes during the year, please contact Precise Books & Tax Solutions today! We will explain these options in more detail and help you to determine what makes the most sense for YOUR situation.