There may be some areas of life in which you can avoid a problem, and it gets better or goes away.
Unfortunately, owing a big tax bill to the IRS is not one of them. In fact, the more you ignore your taxes, the worse they get.
If you owe federal or state income taxes, or you think you might, here’s what you need to know:
1. You can avoid penalties for late filing, even if you can’t pay the total tax due.
It’s natural to not want to file your return if you can’t pay the amount due. After all, the IRS doesn’t immediately miss your tax return. And who wants to complete their return, if they even suspect the results will be bad news?
You may not be able to avoid a tax bill, but you can minimize the damage it does by at least filing your return on time. The IRS imposes a fine for late filing of your tax return. This fine is separate from any interest and penalties you owe on late payment.
In addition, by completing your return, you find out exactly how much you owe so you can make plans to deal with it.
If you don’t have the information to complete your tax return by the due date, you can file for a six-month extension. However, you should still finish your return as soon as possible. It won’t be any easier five and a half months from now.
2. The sooner you pay the tax due, the less you’ll pay in interest and penalties.
Taxes and interest are imposed on your tax bill, starting from when you should have paid them. That may be when your tax return is due (before extensions). If you owe more than $1,000, you may already owe interest and penalties for not making sufficient quarterly estimated tax payments.
You can’t go back in time. However, the fastest way to stop accruing interest and penalties on past-due taxes is to pay them off.
Be cautious about using your credit cards or taking on other debt to pay taxes, however. By the time you pay transaction fees and higher interest rates, you may have been better off paying the IRS directly, even if you can’t do it all at once. Their interest rates are typically much lower than what a credit card company offers.
3. The IRS offers payment options.
If you can pay your tax bill within 120 days, you can ask for a short-term payment plan. You’ll still pay penalties and interest until the balance is paid. However, there are no fees for setting up a short-term plan.
If you don’t think you can pay off your big tax bill within the next 120 days, consider asking for a long-term payment plan. You can apply online, by phone, mail, or in person. Setup fees will apply, and you will continue to accrue penalties and interest. You will pay lower setup fees if you agree to automatic payment withdrawals, apply online, or qualify as low income.
4. You may qualify for an abatement of penalties.
If you could not file your return or pay because of some extenuating circumstances, such as a serious medical crisis, you can write to the IRS and request penalty relief. You should specifically ask for an abatement of penalties. The IRS does not offer interest relief.
5. If you really can’t pay, seek help.
Sometimes people get into deep tax trouble that they can’t work their way out of. If you owe more in taxes than you have in net assets, for example, you may need to consider filing an Offer in Compromise (OIC) with the IRS.
An OIC allows you to settle your debt with the IRS. The IRS compares your net assets (assets minus liabilities) to the amount you owe and may forgive part or all of your tax bill. It also takes into your ability to pay, based on your income and expenses.
And OIC is not to be taken lightly. It requires considerable paperwork, and it is not always accepted. However, if you are in a seemingly impossible tax dilemma, it’s important to know all your options, including this one.