What do I do if I owe Taxes?

IRSIt’s tax time again and each year in April comes the deadline we dread. This year, 2013 the deadline is April 15, Monday. Yes, today! Some of us already filed our Federal Tax Return and know we’ll be getting a fat check from the IRS. Congrats to you! Although it is actually better to get as close to $0 as you can, but that’s an article for another time. Then there’s those of us who owe the IRS a fat check. Another thing to dread. Double whammy this year!! So what is one to do? If I owe taxes what options do I have? Where do I even start?

A few years ago I was hit up by the IRS for a balance owed of close to 6 figures. You can imagine the shock on my face when my annual income wasn’t even that high. Yes I was in the Army and had received some hazardous duty pay but I wasn’t even close to making an amount that would owe that much. I knew there was an error but I had no idea where to start. I did know Google, and that’s where my research began.

If you got bad news do your homework and make sure the balance owed is correct.

If I owe taxes you can be sure I’ll double check their work! Don’t assume them smart guys always do their math right. When I got hit up I knew I was right but I still had to prove it to the IRS. I refiled my tax return by hand (I won’t throw the tax service I had used that year under the bus) and waited. Like everything else in the government their reply was slow but it finally came, and they acknowledged that there was an error and I actually owed $0.

You know you owe the IRS and haven’t filed yet

Big mistake! Always file by the deadline. If you don’t file you will incur a 5% penalty per month for the balance owed. This will be on top of other late fees. If you file on time and let the IRS know you can’t pay, than all you’ll get is a .5% late fee up to 25% of the balance that month.

Minimize the Damage

Pay what you can. The interest accrues on the balance owed that month. For example, if you pay half in May the interest in June will only be on the remaining half. If you don’t pay half in May than the interest in June will be for the whole bill. IRS4868

Can I get additional time to pay?

Yes, this is an option. Based on your circumstances the IRS may grant you additional time. Go to www.irs.gov or call 800-829-1040 and fill out an Online Payment Agreement application.

What payment plan / installment agreement options are there?
  • Pay the amount owed in full. (Always the best option!)
  • If you can’t pay the full amount you should request installment agreements. You’ll need to be current with your returns and estimated tax payments to be considered.
  • Installment Agreements: If you owe $50k or less in combined tax, penalties and interest. You’ll need to request and submit an installment agreement through their Online Payment Agreement application. (See link below for details)
  • Form 9465 and Form 433F Collection Information Statement If you owe more than $50k fill out and mail this form for your Installment Agreement Request. The IRS usually responds within 30 days if it was approved, denied or additional info needed. But you’ll need to fill out these forms before the IRS will even look at an installment agreement for you.
  • Note: Installment agreements do have set-up fees. (See link below for details)
What payment options are there?
  • Credit card – This is an option if the interest on your credit card is lower than the interest the IRS will charge you. (Use one of these processing companies: Link2Gov at 888-PAY-1040 (or www.pay1040.com), RBS WorldPay, Inc. at 888-9PAY-TAX (or www.payUSAtax.com), or Official Payments Corporation at 888-UPAY-TAX (or www.officialpayments.com/fed)
  • Electronic Funds Transfer – Use the Electronic Federal Tax Payment System by either calling 800-555-4477 or using the online access at www.eftps.gov.
  • Check, money order, cashier’s check or cash are also options. You’ll pay with the return envelope you received from the IRS when they sent you that dreaded bill.

Click here for IRS Payment plans, Installment agreements rules.

Check Your Withholding’s

Taxpayers who are paying off a balance will want to modify their W-4. Use the IRS withholding calculator for help in determining the amount that should be withheld for you.

Next Years Federal Return

Don’t count on this because the IRS will hold on to it to cover your unpaid balance still owed.

Everything here is for Federal Returns, Check your State’s rules below

Some states may not accept credit cards. This is just one example of differences.

State department of revenue

Official IRS site

Ten Tips for Taxpayers Who Owe Money to the IRS

Editor’s Note: John is not a registered financial adviser and writes from his personal experience through reading, studying and managing his own finances. All of our financial situations are different and this is just a basic introduction for your own personal knowledge.

Readers, have you been in a “What if I owe taxes” dilemma crisis? What IRS fun have you experienced?

Featured Photo by http://www.flickr.com/photos/mdid/

Photo by http://www.flickr.com/photos/moneyblognewz/

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