Most people file their taxes hoping to get a refund. But that is not always how it pans out. In some cases, you may end up owing the IRS money instead of getting some back in your pocket.
If you end up in this situation, the simplest way to settle the matter is to pay your bill in full. But for many, whether due to rising costs or a lack of financial stability, that is not an option. It is important to note that even “if you can’t pay your taxes, you still need to file your tax return so you don’t get hit by failure-to-file penalties, which are a lot higher than the penalties for not paying your bill on time,” said Ramsey Solutions, a financial education website.
Once you have filed, here is a rundown of some of the ways you can settle the amount owed.
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Ask for an extension
Think you could make the payment if you had just a bit more time? “The IRS will provide taxpayers up to 180 days to pay their full tax balance,” and there is “no fee to request the extension,” said H&R Block.
That said, a penalty on the unpaid balance will apply, and the IRS will charge interest “at the short-term federal rate plus 3% (interest may change each quarter),” said H&R Block.
Set up an IRS payment plan
Taxpayers who cannot make their full tax payment by the deadline can apply for an IRS payment plan. There are both short- and long-term plans available, with eligibility depending on how much you owe. “The IRS offers a short-term payment plan (120 days or less) for bills that are less than $100,000,” while “long-term monthly plans are available for balances less than $50,000,” said Ramsey Solutions.
Just note there is a setup fee involved (though it may be waivable in certain situations) and a penalty fee, while reduced, still applies. Plus, “interest is charged at the short-term federal rate plus 3% (interest may change each quarter),” said H&R Block.
Request an offer in compromise
An offer in compromise “lets you settle your tax debt for less than the full amount you owe,” said SmartAsset. However, “this option is available if you can demonstrate that paying the full amount would cause financial hardship,” a determination that will take into consideration “your income, expenses and asset equity.”
Apply for a hardship extension
A hardship determination “occurs when the IRS reviews your financial situation and determines that a taxpayer cannot pay anything toward the back taxes at this time because their expenses exceed their income and they have no assets from which to borrow against or liquidate,” said U.S. News & World Report, citing Michael Raanan, an enrolled agent and the president of IRSvideos.com.
The benefit here is that the IRS “will temporarily stop collection activities,” said CBS News. Still, “interest and penalties continue to accrue on the tax debt, and “the IRS reviews your financial situation periodically” while you are in this program.
