It’s tax time, and you may be dreading that moment when your accountant notifies you of your refund—or lack thereof. Being told you owe the IRS money at tax time can be a devastating blow, especially if you don’t have the money in your savings account to write out that check.
When confronted with a large tax amount owed during your normal tax filing, there are ways you can deal with the situation. The IRS even helps assist those who are not financially secure enough to pay their taxes through the offer of regular payment plans. Of course, to avoid paying interest and fees, it’s best to consult with family members for a loan or look into your savings for the money first.
This is not always feasible, however, so here are some additional tips to help you through.
Payment or Installment Plan
The Internal Revenue Service will work with you so you can pay off your tax debt slowly over time. However, it will cost you in set-up fees and interest. If you are unable to pay your tax debt right away, you can apply through the IRS to get on a monthly payment plan, but there are a few requirements, including filing all required tax returns and determining the largest amount monthly you can make.
Keep in mind that any and all future refunds will be applied to any tax debt you incur until you have paid off the debt in full. As of 2014, the fee for a direct debit settlement is $52, the fee for a standard agreement or payroll deduction is $120 and the fee for filing if your income is below a certain level is $43. Assuming you owe less than $50,000 in taxes, you can fill out the Online Payment Agreement Application to get started. You’ll also need to complete the Installment Agreement Request.
If you know you won’t be able to afford your tax payment this year, the IRS cautions against panicking. Instead, file by the normal deadline of April 15 and pay as much as you can by the deadline to avoid or limit penalty and interest charges.
Pay by Credit Card
You may be asking why you should pay off one debt that might end up plunging you into another debt. Most finance experts suggest doing this only if you are experiencing a timing issue rather than a financial issue. In other words, if you simply don’t have the money at all, paying by credit card is not the option for you, as you’ll end up paying way more in interest over time.
However, if you owe taxes and you know you will be getting money soon but you just don’t have it now, placing it on a credit card until you can pay it off will keep the IRS happy with your payment.
Ask for an Extension
You can also ask the IRS for an extension on your payment deadline if you just need a bit more time to come up with the money. The IRS may grant you a short extension on your time to pay, usually an extra 120 days. Requesting an extension will help you incur fewer penalties and less interest than if you were to set up an installment plan over the long haul.
An extension is a good idea for those who know they will be able to pay off the debt in full shortly but simply can’t at present. No fee is involved in filing for a payment extension. A good faith effort to pay whatever you can is taken much better by the IRS than ignoring them.
Ryan Delridge enjoys sharing his tax-season advice with an online audience. In addition to researching the best money-saving practices, he has recently taken an interest in learning how to invest in oil wells with U.S. Emerald Energy and develop monthly distributions.