Your tax preparer has finished your return and you’re hit with the dreaded words “you owe the IRS”. You may have been expecting this, or it might come as a surprise. Either way, you still owe. Your problem is that you don’t have the funds available to pay the bill. What should you do? What options do you have? First off, don’t panic, neither ignore the problem. Go ahead and file the return on time. This avoids an IRS penalty. You need to understand the IRS assesses penalties for not filing, and not paying on time. The IRS also charges interest on late payments, presently the interest rate is 7%.
It might be to your advantage to borrow the money to pay your tax bill. A bank or a friend may charge a lower interest rate than the IRS. Your next option is to work with the IRS directly, again don’t ignore the problem. The IRS offers a short-term payment plan. You can pay off what you own within 180 days. If you won’t be able to pay the balance within six months, the IRS offers a long-term payment plan. You sign up for this plan online at the IRS website, irs.gov. If your tax bill is so large you don’t think you will ever be able to pay it, you may qualify for an Offer in Compromise. With this plan you come to an agreement with the IRS to pay a reduced amount. Whatever plan you use, make sure you make all the required payments on time. With all IRS payment plans, early and consistent communication with the IRS is vital.
If you owe tax to your state the same principles apply. Contact your state tax department, explain your situation, and work out a payment plan.
So, what about next year? How did you get into this year’s situation and what can you do to avoid it? The simplest solution may be to increase your withholding from your paycheck. You can fill out a new W-4 form found on the irs.gov website and submit it to your employer. If your income comes from sources where you can’t withhold, you may need to make quarterly estimated payments. You can do this easily online on the IRS website.