Each year, about 75% of American taxpayers receive a refund when they file their tax returns. However, some find themselves owing money to the IRS instead. If you’re one of them and unable to pay by the April 15, 2025, deadline, don’t panic. There are several options to manage your tax debt while minimizing penalties and interest.
Are You Eligible for an Extension?
If you live in a federally declared disaster area, your filing and payment deadlines may have been automatically extended. Check the IRS website for updated tax relief information or consult a tax professional to verify your eligibility.
Why Do Some Taxpayers Owe Money?
Tax bills arise when:
- Employers under-withhold taxes from wages.
- Self-employed individuals fail to make adequate estimated tax payments.
- Capital gains from investments go unaccounted for in tax planning.
If you find yourself with a tax bill you can’t pay immediately, here are some strategies to consider.
Best Ways to Pay Your Tax Debt
1. Family Loan
Borrowing from friends or family can be a cost-effective solution since it typically comes with low or no interest. However, ensure clear repayment terms to avoid conflicts.
2. Home Equity Loan or Line of Credit (HELOC)
If you own a home, tapping into your equity can provide access to lower interest rates than credit cards. However, applying for these loans takes time, so begin the process early if you anticipate needing funds. Note that under current tax law, interest on these loans is not tax-deductible unless used to improve your home.
3. Credit Card Payment
You can pay your taxes via credit card through IRS-approved service providers like Pay1040 and ACI Payments, Inc. Be aware that:
- You’ll incur processing fees (typically around 1.87%-1.98% of the payment).
- Interest rates on credit cards are higher than other financing options.
4. IRS Short-Term Payment Plan
If you owe less than $100,000 (including penalties and interest) and can pay within 180 days, you can apply for a short-term payment plan online. No setup fee is required, though penalties and interest will accrue.
5. IRS Installment Agreement
For debts of $50,000 or less, you may qualify for a streamlined installment plan with payments spread over six years.
- Setup fees range from $22 (for electronic debit) to $69 (for non-debit payments).
- If your balance exceeds $50,000, you must submit a Collection Information Statement detailing your financial situation.
6. Retirement Account Withdrawal (Least Recommended)
Withdrawing from a 401(k) or IRA should be a last resort due to:
- Ordinary income tax on the withdrawal.
- A 10% penalty if you’re under 59½.
- Lost potential growth for your retirement savings.
7. Offer in Compromise (OIC)
An OIC lets taxpayers settle their debt for less than what they owe if they prove financial hardship. To qualify:
- All tax returns must be filed.
- Estimated payments for the current year must be made.
- Bankruptcy must not be open.
Applying requires submitting IRS Form 656 and a detailed financial statement. The IRS charges a $186 application fee, waived for low-income applicants.
8. Filing an Extension ≠ Payment Extension
Many taxpayers assume that requesting a tax return extension also delays payment, but that’s incorrect. Even with an extension, penalties and interest accrue from the original April 15 due date.
Consequences of Ignoring Tax Debt
Failure to pay or make arrangements can lead to serious IRS enforcement actions:
- Wage Garnishments: The IRS can seize a portion of your paycheck.
- Bank Levies: The IRS can freeze and take money from your bank account.
- Property Seizure: Assets, including real estate and vehicles, can be confiscated.
- Tax Liens: A lien can be placed on your property, affecting your credit and ability to sell assets.
Act Now to Avoid Penalties
If you owe taxes but can’t pay in full, it’s crucial to take action before penalties escalate. Contact a tax professional or the IRS to explore your best payment options. Don’t ignore your tax debt—the sooner you address it, the more manageable it will be.
For personalized assistance, reach out to our office today and let’s find the best solution for you.
