Come tax time, everyone hopes to end up with a refund, and for 8 out of 10 taxpayers, the hope turns into reality. However, you are not alone in owing money that you cannot pay. Many of the 20 percent who owe money when they file their taxes struggle to pay their tax liability, even after calculating all the deductions and credits for which they are eligible. To minimize any problems, there are some important actions you need to take if you cannot afford to pay your tax bill.
File Your Tax Return
No matter how large your tax bill, you need to file your tax return. Not filing can lead to criminal and civil penalties, while filing but not paying only leads to civil penalties. Although the IRS typically does not bring criminal charges on people for late-filing or non-filing their returns, you still run the risk of jail time or large fines for when you do not file. Filing but not paying reduces some of the penalties you otherwise would face, which could also lower some of the amount of money you end up paying.
Pay What You Can
When you file your tax return, you should pay what you can. During the first five months you miss a payment, you are liable to accrue fines and late fees that total as much as 25 percent of your tax liability as well as interest. Any amount you can apply towards your bill reduces the additional debt incurred by interest and penalties, saving you money in the long run.
Can You Take Out a Loan?
If your tax bill is low enough, you may be able to take out a loan or use a credit card to pay the bill. Although you still will accrue interest, it is typically less than what the IRS charges. Furthermore, you will not suffer penalty fees, as long as you pay your credit card or loan payment on time. It might also be beneficial to inquire with your relatives or other individuals if they will front you the money for an interest-free or low-interest loan.
Request Additional Time to Pay
The IRS offers the option to request for a short extension (around 120 days) for paying your tax bill. You still will be liable for some penalties and interest, increasing the final amount you pay. However, because you have requested the additional time before your tax is due, you will generally be charged less than if you had just not paid. Before the extension expires, you will have to pay your entire tax liability, including the interest and payments, in one lump sum. This service does not have any additional fees. Some individuals may qualify for an extension of time to pay, which waives any late payment fees and is typically granted due to undue hardship.
Sign Up for a Payment Plan
The IRS offers payment plans, known as Installment Agreements, for those who cannot pay their tax bill in one large payment. These typically charge a higher interest than other types of loans and you still accrue penalty fees, which means you end up paying a significantly higher amount of money than the original debt. You also have to pay a user fee of $105 to set up the plan, although this is adjusted for those of a lower income level.
Although they cost money, Installment Agreements have numerous benefits, including allowing you to pay an amount that easily fits your budget every month over a period of time until you have paid in full. You can also set it up to automatically withdraw, so you do not have to worry about forgetting your payment. Additionally, the IRS cannot take collective action against your federal tax debt, as long as you remain up to date on your payments.
In order to be successful in your application for an Installment Agreement, you need to be current on your tax filings, which means that you have to have all your past tax returns filed. If you are subject to quarterly tax payments, then you must be up to date on those as well. If you owe more than $25,000, then it may be harder to negotiate your payment plan than those who owe less than $25,000.
Prevent a Large Tax Bill in the Future
If you find you often owe more money than you can pay in one setting, then it is time to take preventative action. This will not help you for the current year, but it will help you avoid a similar situation in the future. If you are self-employed or a contract employee, then make quarterly tax payments, which are required for those who make above a certain amount. They are beneficial because they help spread out your tax payment and reduce the burden, so even if you are not required to do so, you should consider doing so.
If you are an employee, then make sure the right amount of money is taken out of your paycheck each month. You can also request more money to be withheld, which helps to cover a larger tax bill at the end of the year. If you do not want to do something that official, then put money into a dedicated savings account every paycheck to help cover your bill come tax time.
You do have choices if you cannot pay your tax bill, so you should not panic. It may seem frustrating and scary, but as long as you file your return, you can find a way to find the money to pay the bill. If you are unsure of the best action for you, then contact the tax professionals at Fidelity Tax Relief at 877-372-2520. We are here to help you find relief from your burdensome tax debt.