It’s terrifying when you get to the end of your tax preparation and realize you’re in debt to the IRS. Although nearly 80 percent of tax filers receive a refund, certain situations — like being self employed or not withholding enough money from your paychecks — can mean that you end up owing money to the IRS. And that can be a major financial burden — especially if you weren’t expecting it.
If you find yourself in this position, don’t panic! Although it may a stressful situation, there are steps you can take to resolve the situation. First of all, make sure to file your tax return on time, even if you can’t pay the balance. Filing late will only result in additional penalties. And don’t ignore communication from the IRS — you’ll only subject yourself to further penalties and interest on outstanding balances. Take a look at the following options that may help minimize the consequences.
SHORT-TERM REPAYMENT
If you owe a small balance, you may just need time until your next paycheck or even a few weeks, maximum. In this instance, it may be best to wait until the IRS sends you a bill. Even after receiving your tax return, it may take them a few weeks to prepare your paperwork, giving you some time to save up the money.
This isn’t recommended, however, if you have a lump sum that will take you a while to pay down. But, if 2-4 weeks is all you need, then it could be in your best interest to pay the late bill when it comes. This could save you some money on additional interest.
INSTALLMENT PLAN
The IRS also offers installment plans for those who have a larger balance to pay.
You will need to fill out a Form 9465, which is a request to set up a payment plan, and send it in with your tax return. The form will ask you how much of your balance you can pay up front, and how much you can pay monthly. This gives you some control over the terms of your installment plan, but don’t drag it out too long as it will accrue interest. Options are available to have the payments automatically withdrawn from your bank account, or you can make your payments with a check, money order, or credit card.
OFFER IN COMPROMISE
In extreme cases where you’re simply unable to pay the full amount, the IRS offers what is called Offer in Compromise. This is where the IRS agrees to accept less than the amount you owe. These requests are evaluated on a case-by-case basis and may not necessarily be approved.
To qualify, you’d need to make an offer that’s equal to or greater than your reasonable collection potential (RCP). RCP measures your ability to pay your taxes and is calculated based on the value of your assets. If your offer is accepted, you must pay the balance within five years.
OTHER RESOURCES
It may also be worth looking at other financing options. You may have resources available that will save you money in the long term by allowing you to avoid interest and penalties charged by the IRS.
Consider the equity in your home or pulling money from savings. If you have a credit card with a low interest rate — or can get one with 0% financing for a set period of time — that may be a good option as well.
Consider asking your employer if you have the option to cash out PTO, or see if you have any friends or family members who could give you an interest-free loan.
NEED HELP WITH YOUR TAXES?
If you haven’t filed your tax return yet, and you’re afraid you will owe money, it’s worth investing in the services of a licensed, professional tax preparer. Although it may be tempting to do your taxes yourself and avoid the professional fees, you may be missing out on deductions and credits that can lower your tax bill.
Get your guaranteed maximum refund when you file your taxes with VTax. You’ll get the ultimate in quality preparation no matter how complicated or difficult your tax situation might seem. Request your free quote today!