Can't Pay Your Taxes? Here Are 5 Tips to Pay the IRS
Updated on Apr 27 2018
Tax Day is over and you owe money. Many Americans have found themselves in this frustrating situation, but don’t worry; there are ways to pay your tax bill without breaking the bank.
While it’s a relief your taxes are done, now you have to figure out how to pay the “taxes due” to the IRS instead of getting a refund. Many Americans go into panic mode after they realize they have to come up with hundreds or thousands of dollars they weren’t prepared to pay; but there is an answer to the turmoil.
Here are some tips for dealing with a surprise tax bill.
1. File and Pay As Much As You Can
Filing and accepting that you have to pay will help you avoid a late filing penalty. If you have any spare funds in your savings account or other accounts, pay as much as you can to reduce interest charges. The IRS allows you to pay online, by phone or by check or money order.
Once you make a payment, the IRS will send a bill for the remaining balance, which should take approximately 45 days – giving you more time to save and possibly pay cash for the balance due.
2. Pay in Installments
An installment agreement is a monthly payment plan with the IRS and is the most common method for paying an IRS tax debt. If you owe less than $10,000 and can’t come up with the cash, take the path of least resistance and go for the installment plan as the fees are typically always less than a credit card.
Use the Online Payment Agreement tool on IRS.gov or file Form 9465, the Installment Agreement Request, to set up a payment plan. You can even set up a direct debit agreement.
3. Borrow the Money or Consider a Loan
One of the easiest ways to avoid interest penalties is to borrow the money from a relative or close friend. You can borrow what you need to pay the full bill and then creative a reasonable payment plan to reimburse the person who gave you the loan. If you can avoid paying interest with a personal loan you’ll save yourself some money; but keep in mind that if you borrow more than $10,000 you may be subject to taxes on that loan the following year.
If you take out a loan from a bank or take out an equity line of credit, you’ll most likely pay less in interest than the interest and penalties you’d owe to the IRS on the unpaid tax.
4. Pay by Credit Card
Credit card is an option that may work if you have a low interest rate or a special deal such as a one-year 0% APR with a balance transfer. While paying with a credit card isn’t ideal, it does allow you to pay your tax bill on time which keeps the IRS from charing you penalties and interest. Keep in mind, though, that the interest rate that your credit card company charges may be higher than what the IRS charges on installment payments or late payments, so double-check what makes the most sense for a less expensive accrual payment.
Bankruptcy is a way to resolve debts if you are unable to pay them. This is a last-ditch option, but declaring bankruptcy will stop or slow down the IRS in their attempt to collect your tax bill. In some cases, interest and penalties will also stop growing, so it’s worth it to discuss with a financial advisor if this option makes sense in your unique situation. Bankruptcy reduces overall debt burden by eliminating certain types of debt, such as credit card balances, which will leave more money to pay your IRS tax bill. Keep in mind there are consequences for filing bankruptcy, though, to your credit and line of equity.
Get Ahead of Next Year’s Tax Bill
Planning ahead will help set you up for future financial success. If you don’t want to owe again next year, look at your withholding on your W-4, especially since the tax code has changed. If your income is relatively stable, it makes sense to increase your withholding to enough so you’re not surprised again next year. Read our Top Tax Tips for Seniors article for more in-depth savings opportunities.