Most years when tax season rolls around, a good bulk of Americans flood e-commerce and local malls with all their income tax return money, blowing it fast on a new Spring/Summer wardrobe or booking flights for their next vacation. However, according to various resources, this year is looking very different.
According to CNBC, the average tax refund is down 8.7% from last year and a lot of people report owing money for the first time. So, what do you do if you actually owe money — and lots of it — this year? We spoke to some tax experts to get their top five tips on how to handle it.
Above all, experts agree that whatever you choose to do to handle the debt, you should never just ignore your tax obligations.
“Don’t let your tax debt sit,” says Alice Stevens, of Best Company.com a tax relief resource. “If it is left unpaid, the IRS can impose levies, liens, wage garnishments, and penalties. Stay on top of your tax debt, even if you can’t pay the full amount immediately.”
“You’re looking at combined penalties of 5% per month that you don’t file or pay — that’s 10 times or 100% the penalty for simply failing to pay your tax liability on time,” Logan Allec, a CPA and owner of the personal finance site Money Done Right, warns.
Worst case scenario: Remember when Wesley Snipes and Lauryn Hill went to prison for unpaid taxes? It can come to that if you neglect your taxes, and they are so not #taxgoals.
Here are more viable ways to make it through the storm.
Don’t Borrow From the IRS
According to Daniel J. Geltrude, author of Positive Financial Karma, paying the IRS back through one of their high-interest loans could cost you more in the long-term. Instead, consider paying with a low introductory rate credit card (NerdWallet.com can help you find one that is right for you and some even offer 0% interest for up to 24 months) and make sure you take advantage of all the redeemable points.
Ask the IRS for a Little More Time
The old adage “the squeaky wheel gets the oil” doesn’t exist for nothing. If you speak up to the IRS (or any creditor for that matter), most times they will be more than willing to offer you an extension or reasonable plan to help you dig yourself out of the hole.
If your credit won’t allow you to take advantage of credit card offers to pay off the IRS bill — and if you don’t have a wealthy benefactor at home willing to fork over some dough — asking for some extra time to pay may be your best bet.
“Although you will accrue interest and penalties until your tax bill is paid, you can get up to 120 days to pay off your entire balance,” Geltrude offers. “In addition, if you can’t pay off the entire balance at one time you can request a payment plan known as an installment agreement.”
Taxpayers who owe less than $100,000 in combined taxes, penalties, and interest qualify for the short-term payment plan.
Ask the IRS for a Lot More Time
According to Logan Allec, you can request a long-term payment plan if you cannot come up with the money for your taxes within 120 days.
“One benefit of doing [this] is reducing the penalties you will incur for paying your tax bill late,” Allec explains. “Typically, you will incur a penalty of 0.5% of your unpaid tax balance for each month or part of a month that you are late paying your taxes. So, if you have $20,000, which you do not pay for 5 months past April 15, you would incur a penalty of $500. But if you apply for and are approved for a long-term payment plan, your penalty rate would be reduced to 0.25% and your total penalty in this situation would be reduced to $250.”
Long story short, it pays to ask for time.
Consider Hiring a Tax Attorney or Tax Relief Company
Companies like BestCompany.com offer support to help people who are really in a bind when it comes to unpaid taxes — especially if you owe back taxes from previous years.
Also, you can hire a tax attorney to help you navigate and negotiate the tricky waters of dealing with the IRS. They are there to help so it would be silly to not use these professionals as a guide.
They can even help you think about how to set up your taxes for the future so you won’t land in this pickle ever again.
“If you owe a significant amount this year, it’s a good idea to adjust your withholdings. You can do this easily by contacting your human resources department. If you’re self-employed or do freelance work, it can be a good idea to prepay taxes (paying taxes quarterly). That way, you’ll owe less money.” says Alice Stevens.
Admit to Your Financial Hardship
According to Jacob Dayan, CEO of Community Tax, you can apply for the IRS Hardship Program to help you handle this bill – if you’re already going through some financial difficulties. You must have an annual income of less than $84,000 and little to no funds left over after paying the tax bill.
“This program is set in place for those who would face unfair financial hardship after the collection of outstanding taxes,” Dayan explains. “Once you have been declared ‘currently not collectible’ the IRS cannot garnish your wages or take your property in lieu of tax payment. The IRS will work with you to sort out an alternative repayment plan clearing your name off the IRS delinquent tax list.”