For some people, not getting a big income tax refund is a terrible disappointment. The only thing worse is having to pay even a small amount to Uncle Sam at the end of the year.
When you finish your taxes and discover you owe a small amount of tax, however, you should consider that you’ve done something right.
You’ve avoided letting the government hold your money all year, interest free. Instead, you’ve been able to use your own money all along.
If you owe a large amount of tax, however, that’s another story. You may not be able to just write a check to the IRS and move on.
Here are your options when you have more tax than you can immediately pay:
First, try to minimize the damage
Make sure you really owe the money. Read your tax return carefully. If you expected to receive a tax deduction or credit and didn’t, for example, make sure you entered all the necessary information in TaxAct.
If you really owe the additional taxes, and your total tax bill includes interest and penalties, request a reduction of penalties.
If you should have made estimated payments, a large portion of your bill may be the penalties for underpayment of estimated tax.
The IRS often reduces penalties for various reasons.
Write the IRS a letter explaining why you think the penalty should be removed, or “abated.” You must specifically ask for abatement of the penalty in your letter.
Request an installment plan
The IRS may let you pay off your tax with installment payments. You can’t do this every year, but it works when a hefty tax bill takes you by surprise.
The IRS must let you make installment payments if the total amount of tax, not including penalties or interest, is $25,000 or less.
You must show the IRS that you cannot pay the entire amount when it is due and that you’ll pay off the tax within three years under the installment agreement, and you agree to comply with the tax laws while your agreement is in effect.
In addition, you (and your spouse if you file jointly) must not have not failed to file or pay your taxes or had another installment agreement with the IRS within the last five years.
The IRS may let you have an installment agreement for a tax bill over $25,000 if you can show that you can make the payments.
You’ll generally pay a $43 fee to set up the plan, plus interest and penalties.
Borrow the money elsewhere
If you can’t (or don’t want to) make installment payments to the IRS, consider borrowing elsewhere to pay your taxes.
It’s not usually a good idea to put taxes you can’t afford to pay on your credit cards. The IRS charges comparatively low interest rates, so you may be better off making payments directly to them.
The exception may be when you have a credit card with a 0% or very low rate, or when you expect to pay the credit card bill off very, very quickly.
You might look to other sources of money if necessary, such as borrowing from parents or a home equity line of credit. Or consider working overtime or selling something to get rid of that tax bill as soon as possible.
Tax reduction via “Offer in Compromise”
As a last resort, consider making an offer to negotiate with the IRS, called an Offer in Compromise (OIC).
Like many other creditors, the IRS is open to negotiating your bill. An.
However, only use this strategy as an extreme last resort. It’s almost like bankruptcy.
You must offer at least as much as your net worth—the value of everything you own, minus your other debts.