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Did you recently file your tax return only to discover that you were in the red? I guess you didn’t make Uncle Sam’s lucky roster for a refund this year.
And to make matters worse, your personal funds are limited. Now that you’ve input the numbers, not only are you at a loss for words, but you’re also at a loss for money because your tax bill is unaffordable.
What are your options?
Regardless of the route you take, one thing is for certain: The earlier you file, the more time you have to sort things out. All outstanding income tax obligations are due by April 15, the federal filing deadline. And if you fail to file in order to avoid remitting payment, beware of the penalties and interest that await.
The good news is that there are a number of alternatives to consider if you don’t have the disposable cash on hand.
1. Pay the bill in full
If you remit payment in full, you may end up cleaning out your savings account, racking up more credit card debt, or taking out a personal loan. Your credit may also take a hit as you will be forced to rely on debt if an emergency arises, which increases your credit utilization ratio. Or you may lose credit score points as a result of the inquiry for a personal loan.
Another alternative is to borrow from friends or family, which can be a headache in itself if they have strict repayment deadlines that you cannot meet, not to mention the possibility of severed relationships.
2. Set up an installment agreement
The IRS offers monthly payment plans to taxpayers with financial constraints. The standard setup fee is $120, but you can reduce this figure to $52 if you opt into the direct-debit option. Those people who meet the low-income criteria only have to pay $34. See IRS Tax Topic 202 for additional information or call (800) 829-1040 to inquire about setting up an installment agreement..
3. Ignore the bill
Assuming you filed and missed the payment deadline, you will receive a notice from the IRS in the mail requesting that you pay in full immediately. Tossing the notice in the trash without thinking twice will eventually result in a tax lien accompanied by interest and a late-payment penalty.
It could also tank your credit score and remain on your credit profile for up to seven years.
4. Request an extension
The IRS may also grant you an extension of up to 120 days, but applicable interest and penalties will still apply. Simply call (800) 829-1040 to inquire about receiving an extension. In some rare instances, you may be able to talk your way out of the penalty.
5. Make an offer in compromise
You also have the option to apply for an offer in compromise, which will settle your tax liability for less than the total amount that you owe.
To qualify, your income must not exceed $100,000 and the outstanding amount must be lower than $50,000. Approval is contingent upon your assets, income and expenses as disclosed in the OIC pre-qualifier that must be completed in order for your offer to be considered.
You must also submit a nonrefundable application fee of $186 and select a lump sum or periodic payment option. Those who meet a low-income threshold may qualify to have the application fee waived.
The evaluators will ultimately decide whether or not they think you are able to pay the entire outstanding balance before issuing a notice of approval or denial.
Preparing for the future
Now that you are aware of how much stress can arise from unpaid tax bills, will you allow history to repeat itself next tax season? Hopefully, the answer is no. To learn more about reducing next year’s tax liability, check out the video Money Talks News financial expert and CPA Stacy Johnson did last year about reducing your tax bill.
Do you have any additional tips for taxpayers who owe money? Let us know in the comments below or on our Facebook page.