Disclaimer: I'm not an accountant, I just know enough to be dangerous to myself and others. Please seek tax counsel from your accountant. Cool?
If you owe taxes to the IRS, but you don’t have the money to pay them, it can be an overwhelming feeling. That sucks. But the good news is, you can totally come up with a plan to pay it off. The IRS is good like that. As scary as their certified mail notices can be, they definitely want you to be able to settle up with them.
How Much Do You Really Owe?
The first step in paying down tax debt is to confirm that what you think you owe is what you really owe. Review your the tax return (maybe with your accountant) for the year that you owe to make sure you didn’t miss a deduction or make a mistake.
Something as minute as forgetting to tick a box can actually make a big impact on whether or not you received a tax credit, so you want to make sure that find an easy-to-fix mistake before you start shelling out money.
While you’re at it, a glance at prior year’s tax returns could also help. If nothing has changed in prior years expect your tax bill, that’s a red flag that something may have gone awry.
The IRS makes mistakes too. So check on your end first, then call them to confirm what you owe. It’s annoying, but if it could save you from paying what you don’t owe, it’s totally worth it.
Get on a Payment Plan
If you owe taxes, but you can’t afford to settle the whole bill at once, don’t ostrich. Don’t put your head in the sand and ignore it. File Form 9465, Installment Agreement Request, to set up installment payments with the IRS. You might want to have a tax professional help or file this on your behalf.
The IRS must allow you to make payments on your overdue taxes if you meet any of the following criteria:
the amount you owe $25,000 or less, or
You can prove to the IRS that you can’t pay the amount you owe now, or
you’re able to pay off the tax in three years or less.
One big catch is that you must agree to comply with the tax laws and not have had an installment agreement with the IRS in the past five years.
Going Forward Keep Penalties and Interest to a Minimum
Nothing adds insult to injury more than having to pay penalties and interest on top of what you already owe. Make sure that moving forward, you’re doing everything you can to keep your penalties to a minimum. Here are three ways to do it:
Make sure you pay (or withhold) at least the same amount of taxes that you paid last year. Even if you made less this year, paying in at least as much as you paid in last year helps you avoid any underpayment penalties. The second part, which is also crucial in avoid penalties, is to make sure to pay on time.
Send the IRS a Letter
It’s possible to reduce your penalties and interest if you write a letter to the IRS explaining the situation. For example, if something out of the ordinary happened like a very sick spouse or an honest mistake, they may consider removing your penalties and interest. Communication is key.
Don’t wait until the deadline to file your return to pay what you owe.
Sending estimated tax payments is a great way to pay in on time to reduce penalties. If you pay estimated tax payments, you can also avoid having a big tax bill due come tax day.