Learning you won’t be receiving a tax refund is bad enough, but learning you owe money is even worse. The discovery of owing more feels like a crushing defeat. If the amount you owe is more than you can afford simply follow these steps to pay off or resolve the debt.
1. Double Check
Before you do anything else, find out why.
View your completed return carefully and look for errors you might have accidentally made. Trust me when I say it’s easy to add your income incorrectly or simply forget to add a significant deduction. If you missed a question or check box it could cause you to miss out on benefits you are entitled to.
If you have reviewed your tax return and can’t find any errors, locate your tax return from last year. Compare the two side by side, if your tax situation has not changed dramatically, but your bill has, that is a major red flag. Just because the letter you received from the IRS claims you owe money don’t automatically assume it is correct.
The IRS is, of course, a human institution and is just as prone to mistakes. Call or write the IRS about any questions and concerns.
2. Beware Penalties and Interest
What is worst than owing money to the IRS?…….. Being charged ever growing penalties and interest on the amount owed.
Thankfully, there are two ways to minimize these costs effectively.
If you did not pay the full amount this year but owed significantly less last year, you generally won’t pay penalties on the underpayment if you submitted it on time and paid at least as much as last year.
You can also use the annualized income method if you receive the majority of your income during the latter part of the year.
Get out the pen and paper! The IRS will reduce or remove penalties if you the taxpayer writes a letter explaining your situation. Word to the wise doesn’t lie! If you made a mistake, had a death in the family, or was caring for a sick spouse, the IRS may waive the penalties based on your situation.
But sure to ask for an “abatement!”
3. IRS Installment Plan
If you can’t afford to pay the owed bill by the deadline, don’t try and avoid the bill. The IRS has never been known for being lenient in that regard.
File an Installment Agreement Request (IRS Form 9465) to set up a payment plan.
You will be allowed to make payment on your overdue taxes if:
- You owe $25,000 or less
- You prove that you can not pay the full amount
- Prove you can pay off the amount in three years or less
Also, you MUST comply with all of the IRS tax laws, and you can not have had an installment plan in the past five years.
Don’t Do this:
- Charge your tax bill on a credit card
- Take money from your retirement
- And finally, don’t panic.
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