Handling tax bills
Don’t avoid it, but do what’s best
Owing the IRS isn’t fun, but paying that debt is a must. Here are some tips on handling your debt the right way.
1 File If you find that you owe the IRS, your first reaction may be to avoid filing. Don’t, says Kathy Pickering, chief tax officer at tax preparation company H&R Block.
Not filing on time will limit your options with the IRS, and you may incur penalties.
“When people find out they owe, they sometimes just get panic-stricken and they don’t file because they can’t afford to pay,” Pickering says.
2 Find a payment option The IRS offers several payment plans if you can’t cover your balance in one go:
• Short term: This is best if you can resolve your balance within 120 days. There’s no setup fee, though you may accrue penalties and interest.
• Long term: An option if you need more than 120 days to pay off your balance. Fees for this plan vary by the options you choose.
• Offer in compromise: You settle your debt with the IRS for less than you owe. This may be best if you don’t expect to ever be able to pay the full amount. Use the IRS pre-qualifier tool to see if this might work for you.
3 Prevention How to avoid owing the IRS next year: If you work for a company and receive a W-2, consider looking at another form: your W-4. This form, which you filled out when starting your job and likely forgot about, determines your withholding, the amount your employer sends directly to the government to cover your taxes. Withhold too little, and you’ll owe the IRS.
You can alter your withholding at any time. Use the IRS tax withholding estimator to make sure you have the right amount deducted from each paycheck. If you’re responsible for sorting out your own tax payments, make sure you are setting aside money throughout the year. The self-employment tax rate is roughly 15%. Set up automatic deposits into a high-yield savings account. That way, you’re more likely to have enough money at tax time.