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Payment Options If You Owe Money to the IRS This Tax Season

Owe money to the IRS

You’ve done the calculations and finished your tax return. The bottom line shows that you owe money to the IRS. Problem is, it’s going to be tricky to pay this bill due to tight finances. Fortunately, you can pursue options to pay what you owe and avoid penalties.

Learn more about IRS rules for paying your tax bill and the repercussions for not doing so.

Owe Money To The IRS? You’re Not Alone

Truth Is, many Americans owe tax money. In fact, the Commissioner of Internal Revenue has commented that unpaid taxes could hit $1 trillion per year (the gap between taxes owed in taxes paid).

Additionally, consider that the IRS Database reports that around 160 million tax returns are filed annually, but more than 15 million filers are in collections – which means they have filed but cannot pay what is owed. 

Why It’s Crucial To File Your Tax Return And Pay On Time

There’s an excellent reason why you’ll want to pay your tax bill on time: Failure to do so can result in penalty fees and interest incurred.

“Filing your tax return on time avoids the failure-to-pay penalties, which can grow to 25% of the unpaid taxes after five months for missing the deadline,” cautions Agustin Arbulu, president/COO of W Tax Group in Southfield, Michigan. “On an annualized basis, this converts to a charge of 50% of the balance owed. Keep in mind that this penalty is 5% of the unpaid taxes for each month or part of a month that a tax return is late. This can create a real financial burden.”

What Happens When You Owe Money To The IRS But Don’t Meet The Deadline

Let’s say you file your tax return on time but don’t pay what is owed. The IRS will impose a failure-to-pay penalty, which equates to one half of 1% for each month you are delinquent, or for part of a month, up to a maximum of 25% of the amount of tax that remains unpaid from the due date of the return until the taxes paid in full. This is in addition to any interest charge for paying the taxes on time.

“For example, assume you owe $500 in taxes and don’t file your return or pay your taxes on time. Say you wait six months to file. Now, your penalty will grow by $125, increasing your overall tax liability to $625 – exclusive of interest charged and a failure-to-pay penalty of approximately 3%,” Arbulu explains. “The key takeaway here is that the IRS has the power to add interest and penalties that can cripple a taxpayer.”

If you owe money to the IRS but missed the payment deadline, the IRS will expect you to contact them and work out a collection alternative, such as an installment agreement or an offer-in-compromise filing, according to Eric Green, a partner at Green & Sklarz in New Haven, Connecticut.

“If you fail to contact them and initiate a collection alternative, the IRS will resort to issuing fines, levies, and enforcement activity,” adds Green. “The IRS will file a Notice of Federal Tax Lien to secure its interest in your assets, levy your wages, and, if forced to, send your case to the Department of Justice to convert tax liens to federal judgments, after which time your real estate can be seized.”

Options For Paying Money To The IRS

Lack the cash to pay your tax bill? Don’t panic. There are choices you can consider, including:

Option #1: Tap Into Your Home’s Equity

If you own a home and have accrued sufficient equity in it, you can take out a home equity loan or apply for a home equity line of credit (HELOC).

“The interest rate for either option is relatively low and will allow for favorable repayment terms,” suggests Arbulu.

Option #2: Borrow against your retirement plan

“If you are employed, consider taking out a loan from your retirement plan. Employer-sponsored retirement plans may have a loan provision that allows you to borrow up to a certain amount,” says Arbulu. Alternatively, try withdrawing funds directly from your retirement account. However, this may trigger a 10% penalty for early withdrawal, and you’ll have to pay regular income tax on the withdrawal.

Option #3: Take Out A Personal Loan

A personal loan (also called a signature loan) issued by a lender will not require collateral – only a signature. However, the interest rate will likely be much higher than a home equity loan or HELOC. Instead, you could request a personal loan from a loved one or friend, “which is still better than owing the IRS money,” says Greene.

Option #4: Use Your Credit Card

While you cannot charge a tax bill on a credit card, you could take a cash advance against your card and use the funds to pay your back taxes in a pinch.

“But using credit cards is generally a bad idea because the interest rates charged are typically worse than the penalties and interest charged by the IRS,” says Green.

Option #5: Enroll In An IRS Payment Plan

The IRS offers short-term payment plans – up to 180 days during which there is no fear of enforcement action being taken against you – as well as longer-term payment arrangements.

“You will still be charged interest and applicable penalties for non-payment of the taxes, but an IRS payment plan is a fairly easy way to buy time and avoid the late filing penalty,” Arbulu suggests. “The key here is to set up a payment plan that you can afford, not simply a payment plan proposed by the IRS.”

Option #6: Negotiate With The IRS

Green points out that if you owe money to the IRS, you can negotiate directly with them to settle your debt for less than you owe, although this amount will be based on the IRS’s formula. This option is called an offer-in-compromise. 

“I would recruit a tax professional who has a track record of representing clients to the IRS and making offer-in-compromise deals.”

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

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Published April 11, 2022 Updated: April 9, 2022
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