Despite your best efforts, there is always a possibility that your tax bill will be larger than planned. For those on a tight budget, tax debt can be a problem. Fortunately, if you can’t afford to pay your bill in full by the date it is due, the IRS offers several alternative options. The most important point to remember is that doing nothing is not a solution, and ignoring the problem won’t make it go away.
Our new release, The Great Tax Escape, offers details on when and how to take advantage of agency programs designed to ensure that your bill gets paid without risking your assets. The book features expert advice by David Stone, EA, who specializes in partnering with the IRS to solve issues with overdue accounts.
Three Common Causes of Unexpectedly High Tax Bills
While there are a variety of issues that can lead to unexpected tax expense, three stand out for their tendency to cause problems. Your Certified Tax Coach can assist with ensuring that you don’t stumble into one of these traps.
- Self-Employment Income – Most entrepreneurs have heard they should set at least 30 percent of their profits aside for tax expense. However, when you have started a small side venture, or your new business grows faster than expected, it is easy to miscalculate the appropriate amount to save. As a result, you might not have enough savings to pay your tax bill on-time.
- W-4 Withholding Errors – Changes in income and major life events can have a significant impact on your taxes. If you forget to adjust your W-4 withholding, you could be in for an unpleasant surprise when you file your returns.
- Sudden Windfalls – A large inheritance or a lottery win might prompt you to increase spending. In the excitement, it is easy to forget that a portion of the proceeds must go to taxes. At the end of the year, you might discover that you didn’t save quite enough to pay your bill.
Payment Programs Offered by the IRS
The IRS is more interested in receiving payment than putting liens on your assets, so you can be sure that the agency will work with you to find a solution that satisfies both sides. Some of the available options include the following:
- Installment Agreement – As with any other debt being repaid over time, an installment agreement permits you to pay a portion of the amount due each month until your balance is $0. Interest continues to accrue during the life of the installment agreement, so it is always wise to pay a little more than required when you can.
- Offer in Compromise – If you can demonstrate that you are simply incapable of paying the total amount due, it is possible the IRS will settle your debt for a lower amount. As you can imagine, you will have to provide documentation that the amount due is completely out of reach based on your assets and income.
- Bankruptcy – Under certain circumstances, your outstanding tax debt can be discharged through bankruptcy. As with other options, you must meet specific requirements to be eligible. Consult your bankruptcy attorney or Certified Tax Coach for additional detail on including outstanding taxes in bankruptcy proceedings.
No matter what caused your higher-than-expected taxes, the fact remains that the IRS is diligent about collecting payments. If you fail to act, you could be subject to liens and garnishment of wages. As soon as you realize there is a problem, contact the IRS or visit a local office to discuss your options. Remember that the longer you wait, the more you will pay in penalties, fees, and interest.