Navigating the complexities of tax season can be stressful and there is a lot of anxiety that builds up as you go through the process. The worst part is waiting on the outcome of whether or not you'll owe after you've meticulously gathered all your tax documents, filled out the forms, and hit submit. And then that dreaded moment happens. As you eagerly await your refund, the sinking feeling sets in that you actually owe taxes.
It can feel like a punch to the gut, leaving you wondering how this could have happened and what your next steps should be. But fear not, this scenario is more common than you think, and there are strategies and options available to help you navigate this unexpected situation with confidence and clarity.
So what should you do?
FILE ANYWAY: The first step in addressing an unexpected tax bill is to file your tax return on time, regardless of whether you can pay the full amount owed. The IRS imposes penalties for late filing and late payment, so by filing on time, you can avoid one of these penalties.
FIGURE OUT HOW MUCH YOU CAN PAY TODAY: While it may be tempting to ignore your tax bill, taking proactive steps to address it can help minimize interest and penalties. Determine how much you can afford to pay towards your tax bill today, even if it's not the full amount. Every dollar you pay now reduces the total amount subject to interest and penalties.
GET ON A PAYMENT PLAN: If paying your tax bill in full by the deadline is not feasible, don't panic. The IRS offers various payment options to help taxpayers manage their tax debt. You may qualify for a short-term payment extension of up to 120 days or an Online Payment Agreement for longer-term repayment.
Short-Term Extension: If you can pay your tax bill in full within 120 days, you can apply for a short-term extension online at IRS.gov. There is usually no setup fee for this option, making it a convenient solution for temporary financial challenges.
Online Payment Agreement: For tax bills of $50,000 or less, you can apply for an Online Payment Agreement, which allows you to pay your tax debt in monthly installments. Opting for a direct debit payment plan is often the most cost-effective and hassle-free option, with no setup fees and automatic payments.
REASSESS: Use this experience as an opportunity to reassess your tax planning strategy. Review your withholdings and estimated tax payments to ensure they align with your income projections for the upcoming year. The IRS has a free online tool to help with this. Whether you're an employee or self-employed, staying proactive about your tax planning can help prevent surprises come tax season.
Owing taxes can be a daunting experience, but it's essential to approach it with a clear plan and proactive mindset. By filing your tax return on time, exploring payment options, and reassessing your tax planning strategy, you can navigate unexpected tax bills with confidence and clarity. Remember, you're not alone in this journey, and there are resources available to help you manage your tax debt effectively.
DISCLAIMER: We are accountants but we aren't your accountant. For tailored guidance on your individual accounting and tax matters, it's best to consult with a professional. They can provide personalized advice that suits your unique situation.