The IRS wants you to pay the full amount of your tax liability on time. In fact, the IRS imposes significant penalties and interest on late payments if you don’t. Ideally, it is in your best interest to estimate what you may owe and then build that into your family or business budget. Okay, so you didn’t do that.
Owe taxes? What if you cannot pay the tax you owe?
It is in your best interest to make other arrangements to find the money for paying your taxes rather than be subjected to the government’s penalties and interest. Here are a few options to consider:
Obtaining a loan from a relative or friend may be the best bet. Usually, you can get the loan for best terms and the least interest. However, that is between you and who you borrow the money from. We suggest that if you borrow from family or friends, make sure you pay it back according to your agreement. Otherwise, it could affect your relationship in the future.
Another option is to pay by credit card. Chose a service provider that works with the IRS. However, since the IRS will not pay the credit card fee, so you will have to pay it and pay the higher credit card interest rates.
If you owe taxes to the IRS $50,000 or less, you may qualify for a streamlined installment agreement. You can make monthly payments for up to six years. You will still be subject to the late payment penalty, but it will be reduced by half. Interest will also be charged at the current rate, and there is a user fee to set up the payment plan.
When making the agreement, a taxpayer agrees to keep all future years’ tax obligations current. If the taxpayer does not make payments on time or has an outstanding past due amount in a future year, they will be in default of their agreement. At that point, the IRS has the option of taking enforcement actions to collect the entire tax amount owed. Taxpayers seeking installment agreements over $50,000 will need to validate their financial condition. They also have to prove a need for an installment agreement by providing the IRS with a Collection Information Statement (financial statements). Taxpayers may also pay down their balance due to $50,000 or less to take advantage of the streamlined option.
Tap Into a Retirement Account
This is possibly the worst option for obtaining funds to pay your taxes. First, because you jeopardize your retirement. Secondly, the distributions are generally taxable at your highest bracket. This adds more taxes to your existing problem. In addition, if you are under age 59½, the withdrawal is also subject to a 10% early withdrawal penalty, which compounds the problem even further.
Whatever you decide, do not ignore your tax liability. That is the worst thing you can do. Trust us when we say, it will not just go away. It will haunt you. If you have found yourself in this predicament, call Alex Franch, BS EA at 781.849.7200. Alex is an enrolled agent with the IRS and he has the knowledge to help you work through these unexpected situations.