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Updated for tax year 2023.
Ah, the ultimate tax question: What should you do if you owe more taxes to the Internal Revenue Service (IRS) than you can afford?
Discovering you owe more tax than expected can leave you feeling defeated. Not getting a tax refund is bad enough, but finding out you owe a lot of money is even worse. Fortunately, you can pay off or resolve that federal income tax bill by following these steps.
At a glance:
- Always verify your numbers to ensure your tax bill is correct.
- Avoid penalties and interest by paying promptly and requesting penalty abatement if you have a history of good tax compliance.
- TaxAct can help you set up an IRS installment plan if necessary.
1. Figure out how much you owe the IRS
We have a free tax refund calculator you can use to get an idea if you will owe money to the IRS this coming tax season. Of course, you won’t know exactly how much you owe until you complete your tax return.
Once tax season rolls around, read your completed tax return carefully before you submit it. Double-check to ensure you didn’t accidentally add the same income twice or to forget a substantial deduction.
If your tax return is missing a deduction or credit you thought you qualified for, make sure you answered all of TaxAct’s questions correctly. One missed question or overlooked checkbox could cause you to miss out on a money-saving tax benefit. Always give your tax forms a second glance before submitting them to ensure you include all the correct information.
Another way to determine if something is amiss is to compare your current year’s return to your prior year’s tax return. If your tax situation did not change drastically, but your IRS tax bill did, that’s a red flag, and you should stop and investigate the change.
Lastly, if you received a letter from the IRS stating you have tax due, don’t automatically assume the IRS is correct. They can make mistakes, too. If you’re unsure, call or write to the IRS for clarification.
2. Minimize penalties and interest
Large tax bills are worse if you must pay penalties and interest on top of the original amount owed. Luckily, you can minimize these extra charges in three ways:
- Exceptions to underpayment of tax penalties: Say you underpaid your taxes last year because you owed considerably less last year and were basing your payment off the prior year’s amount. As long as you pay by the tax due date, you typically won’t pay a penalty for underpayment of tax if you withheld at least as much as you owed the prior tax year. TaxAct® can help determine if the safe harbor rule reduces your penalties and interest. Simply enter last year’s tax liability, and our software will calculate for you. You may also reduce your penalties and interest using the annualized income method if you received more of your income in the latter part of the year.
- Asking for an abatement of penalties: The IRS might reduce or remove penalties and interest on the penalties if you write them a letter explaining the situation. For example, if you had an unusual tax event, you made an honest mistake, or you or your spouse had a serious illness, the IRS may choose to waive the penalties. To qualify, you generally have to have a history of good tax compliance. In your letter, be sure to ask for an “abatement.”
- Paying as quickly as possible: If you owe tax that may be subject to penalties and interest, don’t wait until the filing deadline to file your return. Try to send an estimated tax payment or file early and pay as much of your tax bill as possible. Remember, even if you choose to file an extension, any taxes owed are still due on the filing deadline. You are subject to those extra penalties and fees if you don’t pay your tax bill by Tax Day (typically April 15 or the next business day if it falls on a weekend or holiday).
3. Request an installment plan if necessary
If you can’t pay off your income tax bill by the time it is due, don’t avoid it. File Form 9465, Installment Agreement Request, to set up installment payments with the IRS. You can complete the installment agreement when you file with TaxAct as well. Completing the form online can reduce your installment payment user fee, which the IRS charges to set up a payment plan.
You can make payments by direct debit with your bank account, check or money order, credit card, debit card, payroll deduction, or one of the other accepted payment methods.
4. Offer in compromise
You may have heard ads from experts promising to help you settle your IRS bill for less than you owe. The IRS will indeed negotiate back taxes through an Offer in Compromise (OIC).
However, you’ll likely have to offer at least as much as your net worth, which is everything you own reduced by your debt. If you take this route, there are two options: a lump sum cash offer payable in five or fewer installments in five months or a periodic payment offer payable in six or more installments over 24 months.
An OIC is a lot like bankruptcy — you should only use it as an extreme last resort. The IRS has an online tool to help you determine if you might qualify for an OIC.
What not to do
And finally, we have a few last-minute tips on what NOT to do if you’re struggling to pay your tax bill:
Don’t use a credit card to pay your tax bill if you can’t afford it. And especially, don’t put your tax bill on a high-interest credit card. The IRS charges a far lower interest rate than credit card companies. That means you can spend more of your money paying off the balance instead of just keeping up with the interest.
Don’t take money out of your retirement accounts.If you withdraw money from a retirement account to pay your income tax bill, you may owe a penalty in addition to income taxes on that amount. By the time you pay the penalty and income tax, you won’t have as much left to pay your previous tax bill as you thought.
Don’t panic. If you play by the rules, stay in touch, and are scrupulously honest, the IRS can be a fairly reasonable creditor, despite what many taxpayers tend to believe. Focus on doing everything you can to resolve and pay off your balance due, and they won’t be your creditor for long.