After figuring out what is causing your tax debt, the next step is to immediately control the issue. There are several ways to handle tax debt so that it is manageable and less stressful on you.
A multi-prong payment strategy will get your tax debt under control quickly and easily.
Before you can resolve the debt, you will want to explore direct and indirect payment options. There are three ways to pay a tax debt directly, and you can weigh which one works best for your situation. Further, there are ways to indirectly pay your tax debt AFTER you’ve gotten a bill.
First, if you have the money, you can send a check for the full tax balance at the time that the tax return is due. Even if you plan on sending your tax return after the due date, you will still want to submit your payment on the due date, which is normally April 15th. If you pay after the return’s due date, you’ll owe penalties and interest, calculated on a daily basis. If you tend to owe every year, and if your balance is over $1000, you may find that you are assessed an underpayment penalty of 10%, even if you pay off your taxes by the return due date.
If you can’t pay the full amount on April 15th, but anticipate you can have the money within 30, 60, 90 or 120 days, then you can request an extension of time to pay (NOT to be confused with an extension of time to file, which allows you to file up to 6 months after the return due date). The extension of time to pay won’t prevent penalties and interest, but at least you will establish with IRS that you intend to pay the balance in full. You will have to call IRS directly in order to
The third option is an installment agreement. These allow you to pay your balance off over a 72 month period, but there is a charge with requesting them (currently $120). Also, if you are late with your payments or end up owing on a future tax year while you’re under the plan, your plan will be cancelled and you will have to pay a reinstatement fee. This works well for those balances that are too large to pay at once. You can fully pay the balance at any time, and you won’t be penalized for paying more than the required amount or for doing a full payoff.
If you’d like IRS’s explanation of payment options, CLICK HERE.
There are a few interesting indirect ways of paying your taxes. These are great because they are usually easy to deploy and won’t put serious cramps in your lifestyle.
One of the least utilized methods for reducing a tax bill is a penalty waiver request. Once upon a time, IRS used to be able to quickly determine your eligibility for waiver when you called them. I’m unsure if they still have this function, but it’s always good to ask. If you are denied your waiver, you can always write to request it. (I have an EASY waiver request template available here!) Allow 30 days for a response, as IRS is required to respond to all written requests within a 30-day period. Pretty much everyone, except the worst tax offenders, probably qualifies for some sort of reasonable cause waiver.
When the penalties are waived, you can expect your balance to decrease. Depending on the type of penalty, you may see as much as 25% vanish from your bill, not to mention the fact that the interest will decrease, since it is calculated on the tax due and the penalties.
Another way to indirectly pay your taxes is to plan for a refund in the subsequent year. So long as you’re under a payment plan, you will be chipping away at the balance, but the quickest way to see a big drop in your tax bill is to have refunds applied from subsequent years. You can increase the likelihood of generating a refund by stopping whatever caused the bill, increasing tax withholdings, increase pre-tax retirement contributions, and by READING about the different tax credits available. Credits can be the difference between paying on a tax bill for 6 years or wiping it out in two or three years.
THIS is why it’s important to file every year, even when you are only getting a small refund. Even tiny refunds can be applied to reduce an existing bill.
If you need to play catch-up and file some older tax returns, feel free to contact me for assistance, or visit your local IRS so that you can get the forms and publications needed to prepare those old returns!
Stay tuned for the third and final part of this series, that addresses how you can prevent owing tax.