Do You Owe Taxes and Cannot Pay?
Did you just prepare your taxes (or you have not started working on your tax return) and found out that you owe the IRS and/or your state tax agency? Cannot afford to pay the total amount due on time? Do not panic, we at efile.com are here to help! Follow these steps on how to take control of your taxes:
- E-file or File Your Tax Return By Tax Day: E-file your tax return on time to minimize your failure-to-file tax penalties, even if you cannot pay anything. If you cannot file your return by Tax Day, file a tax extension to receive an additional six months to file your return. Be aware that an extension does not give you more time to pay any taxes owed.
- Submit Any Tax Payment You Can Afford: You should always pay as much as you can in order to minimize failure-to-pay tax penalties because your penalties will be based on the amount you still owe to the IRS. Consider these direct tax payment options if you have all or some of the funds to pay the taxes you owe.
- Update Your Income Tax Withholding: Adjust your income tax withholding or estimated tax payments throughout the year so you would owe less tax (or no tax) when you file your next tax return. Give a new Form W-4 to your employer (find out how much to withhold by using our tax withholding calculator) or submit a new Form 1040-ES efile it to the IRS. If you receive a pension, withhold more tax from your payments by submitting a new Form W-4P to the payer. See Publication 505, Withholding and Estimated Tax, for details on tax withholding.
Passports and Unpaid Tax Debt
You may not be able to receive or renew a passport if you owe over $51,000 to the IRS. In accordance to the Fixing America's Surface Transportation (FAST) Act, the IRS will send your information to the State Department, who is in charge of passport applications. The Department will use that information to deny your application for a new or renewing passport until you resolve your debt with the IRS. The Department may even revoke your current passport. However, this will not apply to you if you are a victim of identity theft, claiming innocent spouse relief, or you live in a federally declared disaster area.
How to Pay Off Tax Debts
The IRS recommends the following tips for paying off tax debts:
- Pay Your Tax Bill: If you receive a bill from the IRS, you will save money by paying your taxes owed as soon as you can. Even if you cannot pay them all at once, you should pay as much as you can. That way, you will reduce your penalties and interest for late payment.
- Use IRS Direct Pay: The IRS recommends that the best way to pay taxes is by using the IRS Direct Pay tool. It is a safe, easy, and free way to pay from your savings or checking account. The tool walks you through five steps to pay your taxes online.
- Pay with a Credit or Debit Card: Be aware that if you pay taxes owed with a credit or debit card, the processing company you use may charge you a "convenience fee" based on the amount of your payment.
- Get a Short-Term Extension to Pay: If you can pay all your taxes in 120 days or less, you may qualify to apply for a short-term extension to pay with the IRS. Usually, there's no set-up fee for a short-term extension.
- Apply For a Monthly Payment Plan: If you cannot scrape up the funds to pay your amount due in full when you file your return, you can pay off your debt over time by applying for an online installment payment plan agreement with the IRS. You may qualify for the agreement as long as you owe $50,000 or less. If you cannot (or do not want to) apply for the agreement online, you can complete and mail Form 9465, Installment Agreement Request, to the IRS.
- Consider an Offer in Compromise: You can settle your tax debt for less than the full amount that you owe by applying for an Offer in Compromise with the IRS. This may be an option for you if you owe a large amount of tax, do not believe you will ever be able to pay off the entire amount, or if making a full payment will cause a financial hardship.
Ways to Obtain Money To Pay Taxes Owed
Whether you owe hundreds or thousands, you should really ask yourself whether you have the money to pay your tax debt. Here are some options to consider:
- Cash out paid time off from work
- Liquidate savings or retirement accounts, stocks, bonds, etc.
- Sell assets (vehicle, real estate, etc.)
- Borrow the money (bank loan, home equity loan, etc.)
Be aware that the options above may only be good ideas if any interest you end up paying is less than the interest and penalties the IRS will charge you.
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