What to Do When You Can’t Pay Your Tax Bill
According to IRS a lot of taxpayers get tax refunds. Unfortunately, not everyone is so lucky. There are some who have to draft checks to the U.S. Treasury at the tax time.
It’s quite painful to pay taxes throughout the year. It hurts even more when you have to spend the additional money when you are filing the tax return in spring, especially when you were not expecting to do so. But what if you can’t afford to pay your tax bill?
“If you can’t pay your taxes, your points of action should be based on your current financial status and how much you owe,” says Ted Kleinman, owner of US Tax Help and a certified public accountant. “The worst thing to do is (to) not take any action, or to react in a delayed fashion.”
Here are certain things you should do if you can’t pay a tax bill.
1. File Your Tax Return
Don’t think that if you don’t file your tax return, the IRS will not know that you owe money. “The No. 1 thing you should not do is not file simply because you can’t pay,” says Bill Smith, the managing director of national tax office at CBIZ MHM. “It’s a crime not to file a return.”
You will also be charged for failure to file penalty of 5% on the amount of money you owe for every month when your return is late, says Smith. But, the penalty will not exceed 25% of what you owe.
If you file but don’t pay, you will be then charged 0.5% penalty on what you owe every month until you pay full. Hence by filing, you give yourself enough time to pay the reduced penalty. “At that point, you just owe money,” says Smith. “You don’t go to jail for owing money.”
In either case, you will be charged interest on whatever amount you owe. The rate will be determined quarterly, also it will be based on the federal short term rate plus 3%, and it will compound daily.
2. Pay What You Can
If you are unable to pay your entire tax bill, then pay a portion of it. According to the IRS.“You can reduce additional interest and penalties by paying as much as you can with your tax return.” Plus, call IRS at 1-800-829-1040 to tell them about your situation. Maybe IRS gives you an alternate payment option, depending on your ability to pay the bill.
Make sure you direct the IRS to apply the payment you send directly to the tax bill first, not to the penalty or interest, says Smith. By lowering the amount you owe you limits your penalties and the interest you will have to pay.
3. Avoid Paying With Credit
Using credit card may seem like an obvious solution if you can’t afford to pay your tax bill with the check. However, going into a debt on your credit card so that you can pay your taxes means that you are likely to end up owing lot more than the original amount.
For starters, you need to pay the fee the payment processors, the IRS contracts with to handle the credit card transactions. The processing fees may range from 1.87% to 2.25%.
So if you owe around $1,000, then the minimum processing fee of 1.87% will add $18.70 to your tax bill. Fees can be even higher if you pay by using credit–an IRS e-file service provider.
On top of that fee, you will also have to pay interest on your credit card balance as well. And that rate is higher than the interest and the penalties charged by the IRS for your late payments fees. Also, your credit score can fall if the figure you charge puts you close or at your credit limit.
4. Get on the IRS Installment Plan
The IRS lets its taxpayers make monthly payments through the installment plan if they can’t pay their balance in full when it’s due. If you have filed your tax return and you owe less than $50,000 in penalties, taxes, and interest, then you can apply for IRS Online Payment Agreement. This lets you avoid all the hassle of calling IRS or visiting the office to apply.
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