A poll by Civic Science reveals that 43% of U.S. adults expect to owe the IRS this year, while 57% anticipate a refund. Falling behind on tax payments is common; IRS data shows that in 2022, taxpayers owed over $120 billion in back taxes, penalties, and interest.
Common Mistakes and Their Impact
Many people avoid or delay filing due to the complexity of the process, underreport their taxes, or miss deadlines due to life events such as bereavement, illness, divorce, or job loss. Simple errors can lead to significant problems, but help is available.
Preventing Major Issues and Additional Debt
Filing your return correctly and on time is crucial to avoid severe penalties. The IRS will pursue back taxes, interest, and penalties, potentially garnishing wages or placing liens on property. Note that the IRS communicates via letters, not phone calls demanding unusual payment methods.
Dealing with Unexpected Tax Bills
If you’re expecting a refund but end up owing, you might consider borrowing to cover the expense. A Bankrate survey found that while 44% of respondents would use savings for a $1,000 emergency expense, 22% lacked emergency savings, and 35% would borrow, with many opting for credit cards.
IRS Payment Options
Several options exist for managing tax payments:
- Short-Term Payment Plan: Pay the amount owed within 180 days, with no setup fee, though penalties and interest will accrue.
- Long-Term Payment Plan: Requires a setup fee (waivable for low-income applicants) and involves automatic payments, with penalties and interest continuing to accrue.
- Offer in Compromise (OIC): Settle your tax debt for less than owed if you meet specific criteria, though the IRS will thoroughly review your financial situation.
- Extension of Time for Payment: Delay payment without penalties and interest if you can demonstrate financial hardship.
Alternative Cash Sources
If IRS options aren’t appealing, consider these potential sources of cash:
- Liquidated Investments: Selling non-retirement investments can provide funds, especially if they have unrealized losses.
- Required Minimum Distributions (RMDs): Use RMDs for tax payments.
- Roth IRA Funds: Withdraw from a Roth IRA if the account is over five years old and you’re over 59½.
- Loans: Consider personal loans, home equity loans, or home equity lines of credit (HELOCs) as options with potentially lower interest rates than credit cards.
- 401(k) Loans: Borrow from your 401(k) if your employer allows it, but be aware of repayment requirements if you leave your job.
- Credit Cards: Use a credit card’s grace period to manage funds, but aim to pay off the balance promptly.
- Side Jobs or Gig Work: Generate extra income through temporary work.
- Borrowing from Family or Friends: As a last resort, borrow from loved ones with a clear repayment plan.
By taking proactive steps and exploring available options, you can manage a significant tax bill effectively and avoid further financial complications.