Tax season — and tax refunds — can be a financial lifeline for many Americans. But the season can pose challenges for those who owe money to the IRS.
Over 18 million Americans owed taxes in September 2014, according to the most recent data from the IRS. Meanwhile, an estimated 10 million face tax penalties each year, the IRS found.
Here are three tips to help you handle your tax debt to lessen penalties and properly resolve your obligation.
1. Act now
If you have a balance after crunching the numbers, make sure you still file. Ignoring your taxes will make the situation worse, says Michael Kay, a certified financial planner from New Jersey.
“You’ll need to pay the piper. There are no good alternatives,” Kay says. “The penalties for not filing can become criminal, so absolutely file, even if you don’t have the money.”
If you don’t file by the deadline, you could face a monthly penalty of 5% of unpaid taxes, up to a maximum of 25% of your balance, making your tax debt a lot worse.
You can file for an extension if you need more time to file. But you should still pay as much as of your estimated tax as possible by the April deadline to avoid interest and penalties.
2. Review payment options
If you can’t pay your taxes in full within 120 days, the IRS also offers options to help manage your balance:
- Request a payment plan: A long-term payment plan, also known as an installment agreement, is best if you need more than 120 days to resolve your balance. Note that these payment plans can add penalties and interest to your debt and are only available if you owe less than $50,000, including penalties and interest.
- Delay payment: You can temporarily delay payment on a tax debt if you can prove that paying the debt would prevent you from affording your basic living expenses. Eventually, the IRS will come knocking at your door for payment, though, and the debt will accrue interest and penalties.
- Settle for less than you owe: The “offer in compromise” approach can help you resolve the debt with the IRS for less than you originally owed. You’ll have to prove paying the debt would cause financial hardship to qualify.
3. Get help
Tax debt can be tricky. Kay advises consulting a certified public accountant or financial planner to ensure you’re handling your tax situation in the best way possible.
“When it comes to tax prep and dealing with the IRS, you should absolutely work with a CPA from day one,” Kay says. “As far as a financial coach or planner, that might be helpful for them to see what opportunities they have in terms of their cash flow. Sometimes it helps to lay it out and see the bigger picture.”
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