The following is presented for informational purposes only. For specific advice, please consult with a qualified tax professional.
Owing money to the IRS can leave you feeling stressed and buried in debt. Having credit card debt is one thing, but the IRS wants their money and they will take steps to garnish your wages or freeze your bank accounts if they feel you’re not going to pay.
But don’t worry, there’s good news. Just like making monthly payments on your credit card, you can make payments to the IRS to take care of your tax debt before they take more aggressive action.
There are a few things to keep in mind when it comes to paying the IRS.
Continue to File
Even if you can’t pay what you owe, you still need to file your taxes. Not filing can add more penalty fees on top of what you’ll be charged for paying late. Not filing your tax return on time can add an extra 5 percent to your unpaid balance every month up to a maximum 25 percent penalty. If what you owe is significant, this penalty can make it much more difficult to repay.
Don’t Take Drastic Measures
Owing money to the IRS doesn’t mean you have to file bankruptcy to deal with it. Especially if what you owe it less than $10,000. Many people feel like the IRS will take aggressive action immediately and they have no other choice. That’s not the case. The IRS will first ask you to pay and offer you a few opportunities to do so. Avoiding those requests will leave them no other alternative than to go after your funds so don’t ignore them. Instead, try to work with them.
Consider a Loan
Taking out a personal loan with a low interest rate to pay off your tax bill in full may be a better option than setting up a repayment plan with the IRS. Their penalties and interest rates will be much higher and cost you more money in the long run. Plus, a loan company won’t have the ability to be as aggressive when seeking repayment.
Pay with a Credit Card
If possible, pay your bill, or at least a large amount of it, with a credit card with favorable terms. Even if you can’t pay the whole bill on your credit card, reducing what you owe will make it easier to work with the IRS. Just make sure you have a plan in place to manage the credit card portion of the debt.
Request an Installment Plan
If all else fails, you can set up an installment plan directly with the IRS. Applying for a payment plan is easy to do through the IRS website.
You have three options: short-term repayment (repay within 120 days), long-term repayment with direct debit payments (repay within 72 months), or long-term payment without direct debit payments.
Short-term repayment is for debts (penalties and interest included) of no more than $100,000 and costs nothing to set-up. Long-term repayment plans are capped at $50,000 and come with a set-up fee: $31 if you agree to monthly direct debit payments and $149 ($43 for low income participants) if you pay by another method.
Keep in mind that interest fees, just as with your credit card or a personal loan, will continue to be applied so most of your payment will go toward interest in the beginning.
Make a Compromise
If you owe back taxes and have continued to file your taxes every year, you may qualify for an Offer in Compromise. This will allow you to work with the IRS to reduce the total amount you owe and pay it off in one payment. The IRS will analyze your ability to pay based on your current employment, income, and debt. They will then work with you to settle your debt for an amount they feel is fair based on your financial circumstances.
If you’re concerned about your ability to pay any amount to the IRS, consider speaking with a certified credit counselor first. Credit counseling is free and is a helpful tool for anyone struggling to balance their income with their expenses and debts. It’s also nonprofit and unbiased, so you can feel confident that the advice you are given is in your best interests.
Article written by Emilie Burke. Emilie writes about overcoming debt, while balancing trying to eat healthy, stay fit, and have a little fun along the way. You can find more of her work at BurkeDoes.com.