It’s tax time and millions of Americans are crunching the numbers to find out whether they’ll be getting a fat refund check or handing over big bucks to Uncle Sam. Owing money to the IRS isn’t ideal but ignoring the situation won’t make it go away. When you’re strapped for cash you may be tempted to put off paying up but you’re essentially digging yourself a deeper hole in the form of interest and penalties.
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If you’ve got a big tax bill that you can’t afford to pay, here are some things you can do to minimize the damage.
1. File Your Return
Just because you don’t have the money to pay your tax bill doesn’t mean you don’t have to file your return. In fact, you’ll get hit with a penalty if you don’t get your return in by the filing deadline. Currently, the penalty for filing late is 5% of the unpaid taxes due for each month your return is late. The penalty kicks in the day after the April filing deadline and can add up to a maximum of 25% of your unpaid taxes.
There’s also a separate penalty for failing to pay. The penalty rate is 0.5% of your unpaid taxes due and it also starts accruing the day after the filing deadline. If you wait to file your return, you could end up owing a lot more once the penalties start adding up.
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2. Get an Extension
Filing an extension gives you an additional six months to file your return, which means you can avoid the failure-to-file penalty. This is a smart move if you need more time to get your paperwork together. Keep in mind, however, that filing an extension won’t eliminate the failure-to-pay penalty unless you were able to pay at least 90% of your tax liability before the filing deadline. The IRS will also levy interest on the debt until it’s paid.
3. Pay What You Can
Paying something on your tax bill is better than nothing, especially when you’re trying to reduce the amount of interest and penalties you have to pay. Ideally, you’ll want to get your partial payment in before the filing deadline to reduce the amount you’ll be penalized on. You can also continue making payments throughout the extension period if you filed one.
4. Evaluate Your Payment Options
If you owe a relatively small amount, say a few thousand dollars, taking out a loan or charging it to your credit card may seem an appealing way to pay your tax bill. But you could end up paying more in interest if it takes you awhile to pay your card down.
There are several payment plan options available for taxpayers who have sizable tax bills. Setting up an installment agreement gives you a specific timeframe for paying down the debt and you may even be able to reduce or eliminate penalties and interest. If the IRS agrees to a payment plan, you’ll have to file all future tax returns on time and any refunds you may be entitled to will be applied to your outstanding debt.
If you owe back taxes and your income can’t sustain a payment plan, you could also look into an offer in compromise. Basically, this means the IRS allows you to settle your tax debt for less than what you owe. You’ll either make one lump sum payment or a series of payments to clear the debt and the remaining balance is forgiven. The IRS isn’t required to accept an offer in compromise and you can’t make an offer if you’re involved in a bankruptcy proceeding.
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Being stuck with a huge tax bill and having no way to pay can be frightening but you need to attack the situation head-on. Waiting for the IRS to come calling will only make things worse in the long run. The sooner you take action, the better.
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