It’s a good thing I’ve been saving a good portion of my income for the past year. Even with making estimated tax payments — the last of which was due on January 16 — I still have a significant tax bill this year, thanks to increased income.
Many taxpayers dread filing their taxes, even if they receive a refund from the IRS. It’s often a time-consuming process that can be fairly stressful. Plus, pressing Submit on your electronic return (or licking the stamp of your paper return) can bring out fears and anxiety over the possibility of an audit, no matter how diligent you were about your records.
Some people, like me, have a stronger reason for the lack of anticipation: we will end up owing money. And for those who haven’t saved enough money throughout the year, this is a dreaded situation.
What If You Can’t Afford Your Tax Bill?
First of all, you don’t want to owe the IRS money. This type of debt is one of the hardest types to erase. There is no statute of limitations on IRS debt, either, so it won’t just go away on its own if ignored long enough. Even if you declare bankruptcy, it’s very difficult to get rid of tax debt.
Related: How to Adjust Your Witholdings for a $0 Return
Sometimes taxpayers receive a notification saying they owe money, but it might not be accurate. The IRS is a system subject to human error, just like any other agency. You can dispute the amount you owe if it doesn’t match your records and you have a reason to believe your calculation is correct.
Need More Time to File? How to Get an Extension on Your Taxes
The government is sensitive to the issue of whether you can afford to pay, so they’re willing to work with you a little bit. The best option is to avoid using a credit card to pay your debt, which would ordinarily be many consumers’ first choice. When you file your taxes, don’t pay online at that time if you can’t afford it in cash. Instead, wait until after you submit your form and it’s accepted by the IRS. Then, visit the IRS website to file an Online Payment Agreement.
If you take long enough, the IRS will send you a tax due notification, but there’s no need to wait for that to arrive. If you have your adjusted gross income (AGI) from your tax return, the amount you owe, and, of course, your Social Security number, you can get started. The form will first ask you how much you can pay and when you can pay it. Then, it will come up with a payment plan that works for you.
The payment plan will allow you to spread your tax bill out over a longer period of time. This improves the chances that paying your bill won’t cause you a financial hardship, and the IRS still manages to collect the monies due — a win-win in their book. There is a fee for creating a payment plan, ranging from $43 to to $225.
If your financial hardship is only temporary, the IRS may delay collection, though interest and late fees will still be added to your bill. The IRS could also file a federal tax lien, even if they delay collection. This means your property could become property of the government in order to satisfy your debt.
The last line of negotiation with the IRS is an Offer in Compromise. There are only a few situations in which the IRS will accept a lower tax payment than what they believe is due. If the IRS believes you’ll never be able to satisfy your tax liability, but you agree to the amount you owe, an Offer in Compromise might satisfy the IRS.
If there is legitimate doubt about the tax bill — this will usually happen only in complicated situations — the IRS might consider an Offer in Compromise. Also, if you could afford your tax bill, but paying it would create a significant economic hardship, the IRS might consider an Offer in Compromise for you, as well. This is only in exceptional circumstances.
Because the IRS does charge you interest and penalties when you don’t pay in full or on time, the best solution is to pay the bill in full as soon as possible to reduce these extra costs, even if you agree to payment plans. I prefer the above options over other payment types (such as a high interest credit card) when cash isn’t available at the time the bill is due. However, the IRS offers these additional suggestions:
- Cash advances from credit cards
- Bank loans
- Taking cash out of your bank accounts and investments
- Borrowing from your 401(k)
- Cashing out your equity in an asset, like your house
I’m not a big fan of any of these, but it is important to take care of your IRS debt above many other financial priorities.
Have you ended up with a big tax bill you couldn’t immediately pay? What was your plan of action?
Updated December 19, 2017 and originally published April 4, 2017.
{ 16 comments… read them below or add one }
I think it is wrong for them to charge those amounts for use of payment plan. You will be already paying interest on your payments. That should be penalty enough.
This is an important statement from your post – “Because the IRS does charge you interest and penalties when you don’t pay in full or on time, even if you agree to payment plans, the best solution is to pay the bill in full as soon as possible to reduce these extra costs.” Make sure that you are paying an appropriate amount throughout the year, because the IRS does not want you to pay in-full with your tax return come April 15th!
On a similar, but unrelated note I wish the IRS would offer a rule change where everyone had to make one, lump sum payment to the IRS each April and do away with withholding. I have a feeling many more people would start paying attention to how much they PAY, rather than how much they GET BACK.
As good as that would be, I don’t think it would every happen. I prefer getting paid more often than once a year — and the government probably couldn’t operate if a major source of its income was received only once a year. The government doesn’t have the same budgeting skills Consumerism Commentary readers have.
I laughed at the last dig ;)
@JWizzle – I agree with your theory. I hear so many people saying to me “YEAH I’M GETTING A REFUND THIS YEAR!” While this is nice to have a lump sum come to you during tax season, you are effectively offering the government an interest-free loan for the year if you do. Speaking of which, that would be a nice future post on http://www.mikefanelli.com!
JWizzle, while that may seem like a good idea at first, I think it would impose too much cost on the IRS in collecting. Think of how many people would just spend that money and then the IRS would be trying to collect from them. Then the IRS nets less, and government has to charge us more.
never thought of it that way, but people have little self-control so you are probably right!
@Will — True, True, True!
If you MUST go looking for a loan to satisfy an IRS debt, look first to a credit union. Usually they are more consumer friendly than banks with lower interest rates and less strict loan qualification criteria.
I have never owed the IRS and hope I never do! MIKE, “I hear so many people saying to me “YEAH I’M GETTING A REFUND THIS YEAR!” While this is nice to have a lump sum come to you during tax season, you are effectively offering the government an interest-free loan for the year if you do.” What do you mean? Could you explain?
@Cruxman – good question. I should write more about this at my blog. Let’s say the average tax refund is $3,000. Which means, you paid $3,000 more in taxes during the year than what you owed. This results in $250 per month that you paid to the government in addition to what you actually ended up owing throughout the year and the result is them giving you “your” money back during tax time, with Zero interest. If you put that $250 away each month in a high yield savings account OR better yet, into the stock market, your money would appreciate, instead of losing value due to inflation. Understand my premise? If not, I need to write a blog post about this ASAP!
I think that most people don’t pay enough attention to save enough to pay their tax bill at year end. My friend was bragging to me about his $3,000 refund last year, and I suggested that he might want to adjust withholding for this year if he’s getting that much back.
He says he understands that he’s giving the government an interest-free loan, but he likes the feeling of getting that $3,000 lump sum. If he had lower withholding, he’d probably just spend it during the year, rather than putting it towards his student loan (which is what he does with the refund.)
That’s a common reason people who seem to have given it some thought use to excuse the interest-free loan they offer to the government, but all it takes is a little bit of discipline or the one-time set-up of an automated deposit to have the same effect… and pay the loan off more throughout the year than with a lump-sum later on… in the end, saving money on interest.
JWizzle – I agree wholeheartedly. I believe that’s a main reason why people in my state complain about property taxes – for which they actually must write the full checks (2x/year) – and much greater income taxes, but which is hidden.
Also, I think it’s deplorable that the IRS would recommend a cash advance on a credit card. If they want taxpayers to use credit cards at no cost to them, they can simply pass along the credit card fee (3%? 4%?) to the taxpayer and accept credit cards, rather than encourage taxpayers to incur 20% fees to credit card companies for taking cash advances. Guessing the credit card companies have some strong lobbyists/other influence at the IRS.
You are wrong about no statute of limitations on IRS debt. There is one. IRS has 10 years to collect from the date they assess the tax. If you manage to stay under radar for 10 years, which is very unlikely, your debt will expire.