A lot of people actually get excited about tax season. Why? Because they are lucky enough to get a tax refund. But what happens when you aren’t so lucky and you owe taxes one year? What if you weren’t expecting to owe and you don’t have any cash to spare – what do you do then? Here are a few tips if it turns out that you owe taxes.
- PAY ON TIME
Most importantly to remember, is to pay the taxes you owe on time. All of it, by April 18th. There are no extensions for paying the government taxes they are owed. Extensions are for filing returns only, not payments.
The U.S. Government is the toughest collection agency there is and they don’t mess around. If you don’t pay your debt, you not only get hit with a late fee, called a penalty, you also get hit with interest. The penalty is 0.5% for every month, or part of a month, that you fail to pay your debt in full (up to a maximum of 25%). Then on top of all of that, your debt collects interest – daily. The interest rate is determined quarterly and is the federal short term rate plus 3 percent. Ouch.
- SET UP A PAYMENT PLAN
If the amount is not very large, say $500, skip to number three. It may be more cost effective to take more time to come up with the money and take a small hit in fees than try to set up an installment agreement. But if you the amount is substantial and you know you will have trouble paying the amount owed in full, better contact the IRS to get started on a payment plan and do not delay. The agreement may save you from penalties and interest, but it’s still going to cost you. The IRS charges set up fees:
|USER FEE CATEGORY||CURRENT FEE||FEE As Of 1/1/17|
|Regular installment agreement1||$120||$225|
|Regular installment agreement with direct debit (DDIA)2||$52||$107|
|Low income installment agreement (regular or DDIA)||$43||$43|
|Online payment agreement — regular installment agreement3||$120||$149|
|Online payment agreement — Direct debit installment agreement (DDIA)4||$52||$31|
|Restructured/reinstated installment agreement||$50||$89|
|Restructured/reinstated low income installment agreement (new fee)||—||$43|
User fee table notes:
- Apply by submitting Form 9465, Installment Agreement Request (PDF), by contacting a telephone assistor or at an IRS walk-in office. Choose to make payments by means other than direct debit.
- Apply by submitting Form 9465, Installment Agreement Request (PDF), by contacting a telephone assistor or at an IRS walk-in office. Choose to make payments by direct debit from a bank account.
- Apply online. Choose to make payments by means other than direct debit.
- Apply online. Choose to make payments by direct debit from a bank account. Lowest cost choice.
- USE OTHER SOURCES OF MONEY
If the amount owed is not worth the payment plan fees or maybe you don’t want to bother with one, you can always get creative to come up with the extra money. Emergency funds or family loans (which are usually interest free) are some possibilities. Selling some of your unused, unwanted belongings, babysitting or dog walking are great ways for faster cash. Avoid using cash advances from lines of credit, paycheck advance stores or other money options that charge interest. Paying a debt with a debt can keep you in the financial doghouse. It is also not recommended to dip into retirement savings if at all possible. No need to pay a penalty for an early withdrawal and jeopardize your future in one swoop.