What to Do If I Owe IRS and You Don’t Have the Money? 5 Steps to Take
Receiving a bill from the IRS can be a wake-up call and quite a scary experience for many of us. You’ll ask yourself “What to do if I owe IRS?” Fortunately, the IRS is there to help and nourish the relationship between citizens and the state. There is a wide variety of options available to satisfy your tax bill. In our article, we will list 5 steps to take when you find out that you owe money to the IRS.
General Information about Owing the IRS
In the first portion of our article on what to do if I owe IRS, we will be discussing how this can happen and how likely it is to occur. Remember, anyone can owe money to the IRS for any number of reasons.
The W4 Form
One of the most common ways for this to occur is for individuals not to have enough tax withholding done by their employer. Whenever you are initially hired, you fill out a form called a W4. This form asks for you to designate a specific number of allowances. You’ll also decide additional amounts you want to be taken out per pay period.
To be clear, the more allowances you claim, the less your employer will take out of your check for taxes. If you find that you owe money to the IRS, it’s important that you update your W4 form with your employer as soon as possible. When in doubt, consult with a trained tax professional or accountant to determine the correct number of exemptions you should be claiming for your income level.
The Case of Self-Employed Professionals
The second most common way for this to occur is for self-employed individuals. Self-employed income can come from a wide range of sources. At the end of the day, it is the responsibility of the individual to withhold appropriate amounts for tax payments.
Regardless of the reason you owe the IRS, take comfort in knowing that it happens to many individuals every day. Nonetheless, there are a wide variety of methods available to fix it. Let’s take a look at 5 solutions to help you out.
1) Update Your W4 Form
The first step that we will cover in our article on what to do if I owe IRS is to update your W4 form. As mentioned above, the W4 form is used by employers to determine how much tax to withhold from your paycheck. If you work directly for an employer and are subject to tax withholding, you should update this form as soon as possible.
The reason for this is that there is a high chance that keeping your current withholding rate will result in an additional tax bill next year. You can avoid this by decreasing the number of allowances you claim.
The W4 form includes a chart that helps users pick the right allowance amount for them. However, this chart is just a guide. Therefore, it doesn’t have a perfect solution for all situations. When in doubt, it’s best to err on the side of caution and select a lower allowance amount.
In addition, you can also elect to have an additional amount taken out of each paycheck as well. By utilizing these strategies, you can decrease the likelihood of owing money to the IRS next year. You can even make sure that you receive a sizeable return as well.
2) Pay Your Tax Bill
While this one may seem like a no-brainer, the next tip we will cover in our article on what to do if I owe IRS is to pay your tax bill in full. Whenever possible, this is always your best bet for many different reasons. The biggest reason is that this method helps you reduce or eliminate potential penalty payments as well as interest charges.
In addition, paying your bill in full is much easier than remembering to make dedicated payments each month. It’s the best hassle-free way to make sure you are clear with the IRS.
The IRS official website has two different available payment methods. The first is direct pay which goes to your checking or savings account. The second option allows you to use your credit or debit card instead.
3) Request a Short-Term Extension
The third tip to consider in our article on what to do if I owe IRS is to file for a short-term extension. This method is reserved for users who can afford to pay their tax bill in full within 120 days or less. The biggest bonus is that this method doesn’t require any setup fees.
However, you will still be responsible for any accrued penalties. You’ll also get interest charges that accrue from the original due date to the date that you make the final payment. Keep this important fact in mind and work to pay your balance off as soon as possible to reduce your total payment amount.
To apply for a short-term extension, simply visit the IRS website and apply online. It has many different educational resources as well as answers to common questions users may have.
4) Consider a Monthly Payment Plan
The fourth tip we will cover in our article on what to do if I owe IRS deals with setting up a payment plan. This option is best for people who owe more than they could typically afford to pay back in a short time. To apply, you go to the same website that was mentioned in the previous step above.
Payment plans can be customized to meet your specific financial needs. However, you will need to be making payments that cover more than just the monthly penalty and interest charges.
The setup fees for these types of plans vary based on the funding method that you choose. For direct payment plans, the setup fee is only $31. Payments are processed automatically using your checking or savings accounts.
The setup fee jumps to $149 for users who opt for all other funding methods. However, you do have the option to pay your monthly installments using a debit card, credit card, check, or money order. No matter which option you select, it’s important that you remember to select a payment plan that pays off your balance as quickly as you can afford.
5) When to Turn to an Offer in Compromise
The last tip we will cover in our article on what to do if I owe IRS is when to turn to an offer in compromise. What is an offer in compromise? For those who may not know, an offer in compromise is an agreement with the IRS to pay less than the initially required tax bill. This option is mainly suitable for individuals who would be subjected to a substantial financial hardship when paying their tax bill.
There are many different unique qualifications and rules associated with this option. If you are considering it, you may want to consult with a licensed tax professional in your area. In addition, you will forfeit any other tax refunds you may qualify for during the processing period relating to your application.
Though owing taxes is never fun, it’s important to note that it happens to quite a few people each year and that you are not alone. By following the steps outlined in our guide, you can be well on your way to satisfying your tax debt with the IRS. If you have any tips you would like to share, please feel free to post them in the comments section.