Tax day has come and gone. If you’re facing an unpaid tax bill, you’re likely feeling the weight of potential penalties and IRS action. It’s a common situation, and many taxpayers find themselves in similar circumstances. The good news is, there’s no need to panic! While the stress is understandable, solutions are available.
We’ll break down what you need to do now that the deadline passed, explore the various payment options offered by the IRS, and explain how to navigate the process to minimize penalties, and find a manageable resolution so you can breathe a little easier.
Understanding the consequences of late payment
Ignoring an unpaid tax bill after the deadline is a path that leads to escalating problems. The IRS doesn’t simply forget about what’s owed, and the longer you delay, the more severe the consequences become.
Initially, you’ll incur a “failure-to-pay” penalty. This penalty accrues at 0.5% of your unpaid taxes for each month or part of a month the debt remains, up to a maximum of 25%. This means the longer you delay, the more significant the penalty becomes. Additionally, the IRS charges interest on the outstanding balance, which compounds daily, further increasing your debt.
Beyond penalties and interest, the IRS has the authority to pursue collection actions. This can include placing a lien on your property, which establishes a legal claim against your assets. They may also levy your bank accounts, directly seizing funds to satisfy the debt. In severe cases, they can garnish your wages, taking a portion of your paycheck before it’s deposited.
Immediate Actions to Take
File your tax return as soon as possible, even if you can’t pay
The IRS charges a “failure-to-file” penalty, which accrues at 5% of your unpaid taxes for each month or partial month the return is late, up to a maximum of 25%. This is even more than the “failure-to-pay” penalty, so file as soon as you can to minimize this penalty, even if you can’t pay the full amount you owe. Many online programs will guide you through the process of filing, making it quick and easy.
Pay as much as you can
When you file, pay as much as you can, even if you can’t pay the entire amount owed. This reduces the amount subject to penalties and interest. It also demonstrates good faith, which can help you negotiate payment plans or other arrangements with the IRS. It can also reduce the potential for more aggressive collection actions.
Contact the IRS immediately
Call the IRS as soon as you can. Proactive communication demonstrates your commitment to resolving the situation and can help prevent further complications. By reaching out, you can begin exploring available payment options and potentially minimize the accumulation of penalties and interest.
Here’s how to contact the IRS:
- Phone: Call 1-800-829-1040.
- Website: Visit IRS.gov.
Gather all relevant financial documents
To effectively address your tax liability, you’ll need to gather all of your relevant financial records. This will help you communicate with the IRS and aid in exploring payment options. Have the following documents readily accessible:
- Tax Return: A copy of your filed (or soon-to-be-filed) tax return.
- Banking Records: Recent bank statements, including checking and savings accounts.
- Pay Stubs: Current pay stubs or other income documentation.
Payment options and solutions
Being unable to pay your tax bill doesn’t mean you’re out of options. The IRS offers several avenues to help you manage your debt:
Payment plans with the IRS
- Online Payment Agreement (OPA): This is often the quickest way to set up a payment plan for smaller tax debts.
- Installment Agreements: For larger debts or more complex situations, installment agreements allow you to make monthly payments over time.
- Eligibility Requirements: These vary depending on the plan, but generally, you must have filed all required tax returns.
- Fees Associated with Payment Plans: Be aware that there are fees for setting up and managing these plans.
Offer in Compromise (OIC)
- Explanation of OIC: This allows you to settle your tax debt for less than the full amount owed.
- Eligibility Criteria: The IRS considers factors like “doubt as to liability” (you don’t believe you owe the amount), “doubt as to collectability” (you can’t afford to pay), and “effective tax administration” (paying would create an unfair hardship).
- Application Process: The application is complex and requires detailed financial information.
Short-term extensions
- How to Request: You can request a short extension to pay, typically for 120 days.
- Eligibility: The IRS will consider your reasons for needing an extension.
- Limitations: This provides temporary relief, not a long-term solution.
Loan options
- Personal Loans: These can be used to consolidate your tax debt, but consider interest rates.
- Credit Card Payments (with caution): Only use this if you can pay it off quickly, as interest rates can be very high.
- Home Equity Loans: If you own a home, this is an option, but it puts your home at risk.
Currently Not Collectible (CNC) Status
- Explanation of CNC: This temporarily halts IRS collection actions if you’re experiencing financial hardship.
- Eligibility Requirements: You must demonstrate that paying your taxes would create a significant financial burden.
- How to Request: You’ll need to provide detailed financial information to the IRS.
Seeking professional help
If you need assistance, don’t be afraid to call in the professionals. Tax attorneys, enrolled agents, and Certified Public Accountants (CPAs) offer expertise in tax law and IRS procedures, and can help you avoid errors and comply with regulations. A tax pro can help create a payment plan that works for you, and if you face an audit, can also provide representation, protecting your interests and ensuring a fair process.
Prevention for future tax years
Don’t want to repeat this tax stress? Here are proactive steps you can take to ensure smoother tax seasons going forward:
Adjust your tax withholding
- Use the IRS Withholding Estimator to verify the accuracy of your current tax withholding.
- If necessary, complete a new W-4 form and submit it to your employer to adjust withholdings.
Make estimated tax payments (if applicable)
- If you’re self-employed or have non-wage income, ensure you make timely estimated tax payments throughout the year.
- This prevents a large year-end tax liability and minimizes potential penalties.
Establish a dedicated tax Savings Account
- Create a separate savings account specifically for tax obligations. This allows for consistent savings, making it easier to cover your tax bill.
Maintain thorough records
- Keep accurate and organized records of all income, expenses, and deductions throughout the year. This simplifies tax preparation and ensures accurate reporting.
Final thoughts
Remember, you’re not alone in this situation. Help is available, and there are solutions to address your unpaid tax liability. Don’t let the stress of the situation paralyze you. Take immediate action by contacting the IRS, exploring your payment options, and working towards a resolution.
