The tax filing deadline is rapidly approaching, leaving many Americans scrambling. Although many people hope for a refund, you could end up owing the Internal Revenue Service (IRS) money.
If that’s the case, you might have to come up with hundreds or even thousands by the tax deadline. If you can’t afford your bill, the penalties for late payments are steep. Generally, the penalty is 0.5 percent of your unpaid taxes each month. Over time, the penalty can grow to as high as 25 percent of your tax bill. Also, if you don’t file your taxes on time, the IRS will apply even harsher penalties.
The IRS can send you to collections for the unpaid bill. That can hurt your credit score and can even lead to wage garnishment.
If you owe money, but don’t have the savings to cover the bill right now, it’s important to face the problem head on. You can decrease how much you’ll owe in penalties by using the following strategies:
1. Pay as much as you can
To minimize interest charges and penalties, file your tax return on time and pay as much of your tax bill as you can. Even paying a fraction of what you owe can help you save money over time. You can pay online, over the phone, or by check or money order.
2. Negotiate your bill
In some cases, you might be able to negotiate with the IRS to lower your tax bill. An Offer in Compromise (OIC) is when you settle your tax bill for less than you owe. The IRS will look at your ability to pay, income, expenses, and assets to decide to grant you an OIC or not. You can use the IRS OIC Pre-qualifier tool to see if you’re eligible. It costs $186 to apply for an OIC.
If approved, you’ll need a lump sum payment of 20 percent of your tax bill that’s paid upfront. After that, you’ll make monthly installments until it’s paid off.
3. Set up installment payments
If you can’t afford to pay your tax bill all at once, you can ask the IRS for a payment plan, instead. You can even sign up for automatic payments so that you don’t have to worry about missing the due dates.
To request a payment plan, you can use the Online Payment Agreement tool. Or, you can submit Form 9465 through the mail.
If you can pay off your debt within 120 days, there is no setup fee. However, your bill will accrue interest and penalties while you pay off the debt. If you will take more than 120 days, there is a $31 setup fee in addition to the penalties and interest charges.
4. Consider using your credit card
While charging purchases you can’t afford is never a good idea, there are some cases when using a credit card to pay your tax bill is smart and cost-effective. The IRS accepts Visa, Mastercard, Discover, and American Express.
The interest charges and fees on your credit card might cost less than what you’d pay in penalties and interest on your taxes. For example, if you have good credit and a stable income, you could qualify for a credit card with a 0% APR promotional period. Depending on the card, you could have up to 15 months to pay it off without paying interest.
5. Research personal loan options
If you don’t have a credit card or only qualify for cards with a high interest rate, another option to consider is taking out a personal loan. You can borrow up to $100,000 with some personal loan lenders and spread out your payments over five years.
It’s a good idea to compare multiple personal loan offers to ensure you’re getting the best rate. Our list of the best personal loan lenders can help you get started.
Managing your tax bill
When it comes to taxes, being unable to pay what you owe can be frightening since it can have such severe consequences. But the important thing to remember is to not ignore your tax bill. By taking action right away and exploring your options, you can minimize the damage to your finances and get back on track.
To decrease how much you owe by the tax deadline, make sure you claim all of the deductions and credits you’re entitled to receive.
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