- Discover first steps to take when you get hit with an unexpected tax bill.
- Learn about your payment options, inside and outside of the IRS.
- Find out the one thing you should never do to pay your tax bill.
- Learn how to never be this position again.
Tax time is always a bit unnerving, but when you’re hit with a large, unexpected tax bill, it can be shattering. Few people have the resources to simply pull out their checkbook and write a check for thousands of dollars. You may feel that's your only choice, but it's not.
What are your options?
The truth is that even people who owe significant amounts of money have several options available to them. One option is to take advantage of the IRS’ Fresh Start Initiative. It was created for just this purpose back in 2011. Though the lien program won’t make your tax obligation go away, it offers solutions to make things easier. It offers expanded installment plan options, the ability under a program called Offers in Compromise to negotiate a lower tax bill under severe circumstances, and even the opportunity to avoid having to pay some assessed penalties.
Start by checking the math
Though it’s a relief to know that these options exist, your very first step is to check the math. It’s unlikely that you’ll have big changes to your tax obligation unless there’s been another significant shift in your life. Unless you’ve sold a business or property, or no longer can claim a child as a dependent, there’s a very good chance that there’s a math error that needs to be fixed. So, start by comparing this year’s return to last year’s. Then, contact the tax professional who prepared your latest return. Enlist their help both in understanding the big bill and to help you determine the best way to address it if it is correct.
What if the math is right?
If the math is right and you do owe the amount that set off those alarms, your choices are limited to figuring out the best way to pay it. It may be tempting to simply skip sending in the return, but doing so is not going to help. The IRS will quickly figure out that you haven’t filed, and that will land you in big trouble. More than likely, you'll also owe even more money because of penalties and interest. It is much better to take control of your situation rather than let the IRS take the lead. They could contact your employer to garnish wages or file a lien on your home or other property.
Many people make the mistake of filing for an extension and thinking that will delay the need to pay; unfortunately, an extension does not negate the obligation to make your payment – it just extends the time for your paperwork.
When some people get hit with an unexpected tax bill, they submit a small amount of the amount owed along with an indication that more will be forthcoming when they can afford it. This can serve as a stopgap to a problematic situation. But the truth is that the best way to approach this situation is to find a way to pay your debt immediately, no matter how painful doing so may be.
Ways to pay
Want to pay your tax bill in full without having the funds immediately available? There are only a few options. These include:
- Charge your tax debt on a credit card – You may be able to earn whatever points your credit card entitles you to by charging your tax debt, but that bonus will likely be negated by the fact that the IRS charges a 2% fee for that service, and of course you’ll have to pay whatever interest rates your credit card is charging. Still, if you can get a credit card with zero percent interest for a limited period, or even one that offers a cash bonus for charging a certain amount, this may be the smartest way to go (as long as you actually find a way to pay the debt).
- Ask the IRS about an installment plan – This option is available to taxpayers who owe less than $50,000 and can pledge to pay their debt in full within six years by making payments online. This option carries a fee and a variable interest rate that can be excessive. The interest compounds daily with this option. The risk of having a lien placed on your property or your wages garnished is very real should you fail to make a scheduled payment.
- Take out a home equity loan – If you have the time to apply and enough equity in your home, you may want to apply for a low interest rate home equity loan. You can deduct any interest that you pay on future tax returns.
What you should never do
It can be frightening to be in debt to the government and tempting to withdraw money from your retirement accounts. Though this might seem like the easiest way to eliminate the problem, doing so can be a very big mistake. It not only limits the amount of money you will have once you stop working, but you will also have to pay additional fees for early withdrawals.
You are dealing with an unexpected tax bill from last year’s tax return, and you are already several months into this year’s earnings. Are you unwittingly furthering your fiscal problems? Learn how you got into the position you’re in. Take steps to ensure that you are setting aside money for next year, or have the proper amount of withholding being taken out by your employer.
Self-employed individuals who are required to pay quarterly estimated taxes are strongly encouraged to set up a special tax savings account. You don’t want to find yourself at a loss when tax payments are due. The IRS provides a withholding calculator to help with this.
Need help figuring out the best way to pay your tax bill? Wondering how to avoid getting into the same position next year? Are you self-employed and want to make sure you're withholding enough to pay your taxes when they are due? You're in luck! Fiducial can help! Contact Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations. We can help you determine the best steps going forward. Ready to book an appointment now? Click here. Know someone who might need our services? We love referrals!