While everyone hopes to come out even or get some money back when they file their taxes each year, sometimes people do end up owing money – and there is a smart way to go about dealing with that. Owing any amount of money to the IRS – large or small – is a scary prospect, but ignoring the debt won’t make it go away any faster. If you’ve completed your income tax return for the tax year and you’re looking at a huge tax bill, it’s best to take care of it right away. A financial advisor can help you figure out what to do with your taxes. Here’s a look at what you don’t want to do if you’re trying to avoid making the situation worse in the long run.
Owing the IRS Mistake #1: Not Filing a Return
If you owe taxes and you can’t afford to pay, you may think that the best thing to do is just not file a return at all. But that’s not a good idea. When you don’t file your return on time, the IRS automatically tacks on a 5% failure to file penalty for every month you owe taxes, up to a maximum of 25%. On top of that, you’ll also pay interest on the bill until you pay it in full.
Owing the IRS Mistake #2: Not Filing an Extension
Requesting an extension gives you an additional six months to get your return completed. If you file an extension request before the April tax deadline (the deadline for tax year 2023 is April 15, 2024), you won’t have to worry about the failure to file penalty. You will, however, still owe a failure to pay penalty on any outstanding taxes, which comes to 0.5% of the balance. This penalty is also capped at 25%.
Owing the IRS Mistake #3: Not Setting up a Payment Plan
The IRS really doesn’t want to have to come after you to get the money you owe. To make it easier for taxpayers to pay up, Uncle Sam offers payment plans. If you owe taxes and you can’t pay, it’s a good idea to find out whether you qualify for an installment plan. You may be eligible for an online payment plan if you owe the IRS less than $50,000 in income taxes, penalties and interest. If you fit that criteria, you can apply for a payment agreement online. Otherwise, you’ll need to fill out Form 9465 and mail it to your local IRS office to see what kind of plan you qualify for.
The IRS gives eligible taxpayers up to 72 months to get their tax debt paid in full. Keep in mind that interest and penalties will continue to pile up until the balance is paid off. If you’re owed a refund in any subsequent tax years while you’re on the plan, the IRS can subtract those payments from what you owe.
Owing the IRS Mistake #4: Ignoring the Consequences
Aside from the penalties and the interest, there are other things the IRS can do to make you regret skipping out on paying your taxes. Your passport could be canceled, for example, which can throw a wrench in your travel plans. In the worst-case scenario, the IRS could place a lien against your property or garnish your wages. Knowing what’s at stake can motivate you to pay up.
Owing the IRS Mistake #5: Choosing the Wrong Way to Pay
If you don’t have enough cash to cover your tax bill, you might be thinking about taking on more debt to do it. Depending on your situation, that could mean borrowing against your home equity, taking out a personal loan or charging it all to a credit card. The one thing you don’t want to do is make your decision in a rush. It’s a good idea to take the time to compare interest rates, fees and repayment terms for each option so you’ll know exactly what borrowing to pay your taxes is going to cost you.
Bottom Line
Paying taxes is never pleasant, especially when you aren’t expecting to get hit with a bill you can’t afford. Facing it head-on instead of sticking your head in the sand is the best approach if you don’t want to get in even deeper trouble with the IRS. Just make sure you address the problem right away and figure out a way to make it right quickly, rather than waiting and letting it get worse.
Tax Planning Tips
- A financial advisor can help you optimize your financial plan to potentially mitigate your tax liability. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Check what your income tax bill could be using SmartAsset’s free online calculator.
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