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There are few things quite as terrifying as knowing you owe money to the IRS if you can’t pay your tax bill. If you’re sitting on a tax bill, you have some options. The important thing is that you don’t just ignore it hoping that it will go away. It won’t go away.
The IRS will eventually find you, and they may tack on interest and fee charges on top of what you already owe. If you’re not able to pay your tax bill, here are some steps to take.
Consider Bringing In a Professional
There are plenty of DIY systems you can use to find out how much you owe. But sometimes this is all better left to the professionals. A professional knows tax code (that’s their expertise, of course).
They may know different deductions and breaks you may qualify for. They may be able to look at your tax filing and find opportunities to reduce your tax bill. Sure, hiring someone is an investment. But it’s an investment that can pay off.
Set Up a Payment Plan
The IRS actually makes it pretty easy to sign up for a payment plan if you can’t pay the bill in one payment. There are three options—
- The short-term payment plan—The short-term payment plan is 120 days long or less. It’s free to sign up for online, over the phone, or in-person. Fees may apply if you pay with a card. You can also be made from automatic checking account payments, money order, or debit card.
- Long-term payment plan w/ direct withdrawals—If you need longer than 120 days, there’s a long-term payment plan option. Long-term payment plans with direct withdrawals offer some savings. If you set up automatic withdrawals, the payment plan costs $31 to set up online and $107 to set up over the phone or in-person. The fee may be waived if you make a low income.
- Long-term payment plan w/out direct withdrawals—If you need longer than 120 days and you don’t sign up for direct withdrawals, there’s a $149 set up fee when you apply online. Applying in-person or over the phone costs $225. The fee may be reduced and reimbursed if you make a low income.
If you need a long-term savings plan, the direct withdrawal option offers a savings in fees. Think about the pros and cons of each payment plan before signing up. You can learn more about the payment plans, how to sign up, and how to adjust your payment plan at the IRS website.
Think Twice Before Digging Into Savings
You should have a few months worth of household expenses saved up in case an emergency happens. Don’t go digging right into your savings account before thinking about it from all angles.
What if another emergency happens? Will you have enough cash to spare? How long will it take you to save up more money? The IRS payment plan or another financing method may be a better choice if the bill will eat away at your entire savings fund.
Be Careful With Credit Cards
You can pay a tax bill by credit card, but this is another thing that you want to think about carefully. Credit cards can have high and variable interest rates. A high interest rate month over month can increase the amount you pay on the debt exponentially.
The interest rate that the IRS charges for underpayments could be lower than what you would pay with a credit card. Compare the costs associated with both options before running up the balance on your credit card. Using your credit card could get you into a deeper hole.
One credit card hack that could work is signing up for a card that has an interest-free period for a certain amount of time. These are called balance transfer cards. Often the interest-free period is 12 to 18 months. If you can pay off the debt within this timeframe, this would essentially be a 0% interest loan. Yay!
Compare Personal Loans
Lastly, personal loans could be an option to cover your tax bill depending on the type of personal loan you can qualify for. If you can qualify for a competitive one that beats the interest rate and fees that the IRS charges for your tax bill, it could be worthwhile to take out a loan. Learn tips for shopping for a personal loan here.
Owing Taxes Isn’t the End of the World
Getting a tax bill is NOT fun. I can tell you this from experience. But plenty of people have owed taxes before you and plenty of people will owe taxes after you.
The IRS does want their money so you shouldn’t sit on it and hope it will go away. Get help if you need it, establish a payment plan, or review your other financing options. The sooner you act, the better!
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