What to Do If You Owe Taxes

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Taxes: no one likes them. And if you’re not careful, they can pile up quickly. If you owe the Internal Revenue Service (IRS) back taxes, you might have a panicked feeling.

But that doesn’t have to be. There are ways to deal with your back taxes and the IRS. It starts with facing them. Here are some ways to deal with unpaid taxes and a list of what not to do.

Act Immediately With Overdue Taxes

The IRS imposes a penalty if you don’t pay your taxes. Most people realize this. However, many people who know they can’t pay their taxes will avoid the issue by not filing by the due date or not filing an extension.

This can cost you. Even if you know you can’t pay your taxes, file them. Failure to file incurs a penalty. So, you’ll end up paying 5 percent of the tax owed for each month you don’t file.

The maximum amount you can be charged is 25 percent. But if you owe a lot of taxes, 25 percent could be substantial. This amount is in addition to the late penalty you'll receive on your overdue taxes, plus the interest charge.

This makes a bad situation even worse. File on the due date, and if you can, make some payment.

Contact the IRS

The last people most people who owe taxes want to talk to is the IRS. But this could be your saving grace.

If you need to make tax payments, start by attaching Form 9465, an “Installment Agreement Request,” to the front of your tax return. If the amount owed is not more than $25,000, the process is streamlined and can be paid off within a five-year period. If you owe less than $50,000, you can make online payments.

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You'll want to show the amount of your proposed monthly payment and the date you wish to pay it.

The IRS charges a $43 setup fee. You will also be required to pay interest and a penalty, which is usually 0.5 percent of the balance due per month.

But, it drops to 0.25 percent once the IRS approves the installment agreement and if your return was filed on time. You also must not have received a levy notice from the IRS.

Offer in Compromise

If you can’t pay your taxes even with an installment plan, you may apply for an “Offer in Compromise.” This will settle your debt for less than the full amount.

At this point, you make an offer to the IRS. They will review your financial situation and income potential to determine if your offer is appropriate.

You’ll need to send Form 656 for the Offer in Compromise and Form 433A “Collection Information Statement” to the IRS. They will use it to determine your eligibility.

Request Short-Term Extension

If you’re just in a temporary cash crunch and just need a couple months to pay your tax bill, you can apply for a short-term extension.

The IRS allows you up to 120 days to pay the full tax balance. Although there’s no fee to request the extension, the unpaid balance is subject to a.05 percent penalty per month.

Borrow Money From 401(k) or Personal Loan

A 401(k) loan is generally limited to 50 percent, with a maximum of $50,000. You also must repay it in five years.

It can be inexpensive, but it could also impact your retirement savings. Remember, taking money out of your 401(k) can reduce your money’s earning potential.

Another option is a personal loan or credit cards, use your best judgment what will work for you. You don’t want to become deeper in debt.

But keep in mind the IRS will probably ask if you’ve exhausted these options before they negotiate with you.

What Not to Do if You Owe Back Taxes

Deal with the IRS on your own. Don’t go to a tax relief service. All they will do is the same thing you could have done. The difference is they charge a hefty fee.

Just to repeat, don’t neglect to file your tax return on time. If you just can’t do it, then file an extension. Then, you don’t have to worry about a failure to file penalty.

Don’t ignore the IRS. There could be consequences; for example they could:

• revoke your passport
• place a lien on your property
• garnish your wages

The IRS doesn’t resort to these tactics immediately. They will send several notices before garnishing wages or placing a lien on your property.

Don’t ignore them. Swallow hard and deal with them. Be ready to negotiate.

Be Proactive and Correct Your Tax Problem

If you owe these taxes, then something went wrong in the first place. If you’re not taking enough out of your paycheck, then increase it.

If you’re self-employed, be vigilant about paying quarterly taxes. The last thing you want is to end up owing money again next year. The IRS may not be so willing to negotiate.

The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.