Owe Money This Year? 4 Important Things to Know

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If you were expecting your typical refund after filing your taxes, finding out that you actually owe money to the IRS can come as quite an unpleasant shock. Many Americans find themselves in this situation, although the reasons for owing taxes vary.

Don’t Put Off Filing

After you complete your 1040 form and learn that you do owe money this year, you may be tempted to delay filing to avoid having to pay. Don’t do it, as this decision can cost you even more in the long run. Failing to file on time comes with a penalty of 5 percent of the total tax you owe per month, which caps out at 25 percent. If your tax bill is $3,000 and you don’t file until October 1, you could owe an extra $750.

Figure Out How to Pay

Failing to pay the amount you owe by the deadline also comes with its own penalty. The IRS can tack on half of a percent per month, up to 25 percent of the total tax bill. If you can pay the full amount, make sure it’s postmarked or submitted through the online payment system by the due date.

If you aren’t able to pay, you can look into options offered by the IRS. The first is an installment plan, which allows you to make monthly payments toward your debt. Although you will still be subject to interest, paying installments can reduce the financial burden of the full amount. If you owe less than $10,000 in taxes and you meet certain IRS criteria, you cannot be turned down for an installment plan request.

Debt Relief

In some cases, taxpayers are simply unable to pay back the full amount they owe, even with an installment plan. If you are in this situation, whether due to the failure of a business, a personal financial hardship, or the loss of your job, you may qualify for the debt relief program offered through the IRS, which is called an offer in compromise.

If you submit an offer in compromise, you are making an offer to the IRS to be accepted as payment in full. The IRS has tools at its disposal to collect back taxes, so the amount you offer must be at least what the IRS expects to collect from you in a reasonable amount of time. A review of your offer will include an analysis of the equity of your assets, ability to pay, expenses, and income.

Plan Ahead

To avoid getting stuck with a big tax bill in the future, you will need to plan ahead. Review what you owed this year and set aside money the following year to make quarterly estimated payments. You also need to make sure you’ve paid at least as much as you had to pay the previous year to avoid a penalty.

Finding out you owe taxes is a stressful experience, but you’re not alone. The IRS offers debt relief options, or you can turn to third-party companies to provide further assistance with resolving your debt.