4 Things You Need To Know Before Paying Your Tax Bill
Many Americans dread doing their taxes — especially if they know they will end up owing the IRS. If you are one of those taxpayers who will owe money this year, read on to find out everything you need to know before paying your tax bill.
Find Out: 8 New or Improved Tax Credits and Breaks for Your 2020 Return
Be Aware of the Deadline To Pay
The deadline for paying your taxes is the same as the deadline for filing your taxes: May 17, 2021. The IRS extended this deadline for paying 2020 taxes, although usually it is on April 15.
“Many people who owe taxes they can’t afford to pay put off filing or avoid filing altogether. Unfortunately, this isn’t a great strategy,” said Richard Lavina, co-founder and CEO at Taxfyle. “The sooner you file, the better chance you have of avoiding, or at least reducing, IRS penalties.”
The IRS charges penalties for failure-to-file as well as for failure-to-pay, and these penalties increase the later you are to file or pay.
“If you do not file, you can be penalized up to 25% of the amount that you owe,” said Morris Armstrong, founder and owner at Morris Armstrong EA LLC. “Simply filing the return or an extension, and then filing by the due date removes that penalty.”
This means that you should file on time, even if you can’t pay your taxes by the due date.
Related: Tax Year Deadline Dates You Need To Know
Know Your Options If You Can’t Pay the Full Amount You Owe
You may not be able to pay all of the taxes you owe at once, but don’t panic — the IRS does offer payment options.
“There are payment options available for most taxpayers, especially if someone owes less than $50,000 and they don’t owe any other back taxes,” said Arnold van Dyk, Esq., director of tax services at TaxAudit. “In November 2020, the IRS also announced additional relief for taxpayers who owe taxes but are struggling financially because of the pandemic, such as automatically adding certain balances to existing installment agreements, and making it easier to qualify for installment agreements on balances owed of up to $250,000.”
Find Out: What Are the 2020-2021 Federal Tax Brackets and Tax Rates?
The IRS offers both short-term and long-term repayment plans.
“If you can afford to pay what you owe within four months (120 days), this is the easiest way to go because the IRS doesn’t charge a set-up fee,” Lavina said. “Call the IRS at 1-800-829-1040 or request a payment plan online. If you need more than 120 days, the IRS offers several installment agreement options. You tell the IRS how much you can afford to pay each month, and the IRS either approves or denies your request. There are set-up fees involved in long-term payment plans, but you can minimize the fee by applying online and making payments via direct debit from your checking account.”
If you owe back taxes, van Dyke recommends seeking help from a tax professional who specializes in tax debt issues.
“They can help set up an affordable payment plan, perhaps get penalties removed if there are any, and request an appeals review of the case,” he said.
You might also consider seeking a professional if you really cannot pay the taxes you owe.
Be Ready: These Are the Receipts To Keep for Doing Your Taxes
“If you’re dealing with a financial hardship and there’s no way you can afford payments, you might be able to qualify for an Offer-in-Compromise (OIC) or Currently Not Collectible (CNC) status,” Lavina said. “An OIC settles your tax debt for less than you owe. CNC status means the IRS acknowledges you can’t afford to pay your back taxes and agrees not to come after you. However, these are tough to qualify for, and you really need a professional’s help to apply.”
Think Twice Before Paying Taxes With a Credit Card
Ideally, you will pay any taxes you owe with cash. You might be tempted to pay your taxes with a credit card, but this could end up costing you more in the long-run.
“You can pay your taxes with a credit card, but you will pay interest on the amount you charge which, in some cases, will be higher than the interest charged by the IRS,” van Dyke said.
Did You Know: Lost Your W-2? Here’s What To Do
Using a credit card to pay your tax bill can also come with some additional downsides.
“IRS-approved payment processors charge an extra fee for paying taxes with a credit card,” said Michael Benninger, banking writer at Finder.com. “Paying your taxes with plastic could also hurt your credit score depending on your overall credit utilization.”
If You Believe You Don’t Actually Owe the IRS, Dispute the Assessment
Sometimes taxes aren’t so cut and dry. If you believe your tax assessment incorrectly states that you owe taxes, you have some options.
Read More: Made a Mistake on Your Taxes? What You Should Do Now
“There are procedural options available for taxpayers to dispute proposed IRS assessments, and in certain cases, even after the IRS assesses a tax liability,” van Dyke said. “These options can include filing a petition with tax court or disputing the case through filing a request for a collection due process hearing if you have not had a previous opportunity to dispute your issue. An audit reconsideration may also be an option. Make sure you are working with a qualified tax professional who specializes in tax debt issues.”
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