About three-quarters of individual taxpayers received refunds last year, according to IRS statistics. If you are among the many people who find that they do owe taxes when April 15 comes around, here are recommendations on the best way to settle your bill.
Don’t rush to charge it
It’s always best to use available cash for your tax bill. It may seem convenient to use a credit card, but remember that you will be charged interest if you don’t pay off your balance immediately, which will just add another cost to covering your taxes. You will also be charged a convenience fee by the IRS. If you find yourself owing taxes every year, your CPA can help you adjust your withholding, if necessary.
Do pay what you can
If you don’t have the money to pay your bill, contact the IRS to let them know your situation and send in as much as you can by the deadline. Consider filling out Form 9465 to request an automatic installment plan. The IRS will often work with taxpayers who are having financial troubles to help them reconcile their tax debt.
Don’t fail to file
If you see that you will owe tax and you do not file because of it, it will cost you even more in the long run. The IRS will usually charge a penalty of 5 percent of your unpaid taxes for every month you are late in filing a return, up to 25 percent of the total unpaid taxes. So, if you owe $1,000 in taxes, you could end up paying as much as $250 in fees if your return is late.
If you file a return but can’t pay your taxes, you will usually be charged a much lower amount — 0.5 percent of unpaid taxes — for each month you’re late, up to 25 percent of the unpaid taxes. So, it’s best to file even if you’ll come up short on paying your entire tax debt. The penalties may be waived if you can demonstrate reasonable cause for the failure to file. Also, be aware that you will also be charged interest on any outstanding amount in addition to the penalties.
Do remember the ‘fresh start’ program
The IRS Fresh Start program offers a number of options for taxpayers who are struggling to meet their tax obligations. It is possible, for example, to request an installment agreement in which you pay your tax bill in monthly direct debit payments for up to six years.
If you believe you will be unable to pay your entire outstanding tax bill, another possibility is the IRS Offer-in-Compromise program, in which a taxpayer and the IRS agree to settle the tax bill for an amount that is less than what’s owed. The IRS generally will consider a settlement offer if it believes the taxpayer won’t be able to pay off the amount in a lump sum or in a payment plan. The taxpayer’s income and assets are among the issues the IRS examines in considering a settlement.