A taxpayer will often end up with a huge tax bill that will be above what they can afford. This leaves most taxpayers confused on the next cost of action.
Owing Uncle Sam, a sum of money comes as a surprise to most people. A lot of Americans look forward to their tax refund as a substantial financial cushion. However, when a taxpayer gets a huge tax bill in return, it leaves them scrambling for what to do.
With this, here are things to do in case of an unexpected tax bill.
What to do if you have an unexpected tax bill
The IRS specifies that anyone that cannot pay their tax bill has some options: taking part in a payment plan, asking for a payment plan delay or agreeing to pay a lesser value, or making a request for an extended collection period.
Payment Plans
This, most times, is a factor of the specific tax situation. It might include short term plans or long term agreements. (120 days and below or more, respectively). While these are flexible options for the taxpayer, there are sometimes hidden prices.
There are no set up fees for short term plans, but interests and penalties accrue till one pays the balance in full. The cost of a long term plan is 31 USD, with interest and penalties accruing over time. It has a different setup fee, which is a factor of the payment method. Low-income earners can have their set up fee waived.
These plans come with a late payment fee of 0.5% of the taxpayer's unpaid taxes each month. This percentage can rise to 25% in a month.
Offer in compromise
Qualifying for an offer in compromise means that Uncle Sam agrees that the tax debt is settled less than what is owed. However, it comes with strict qualifying conditions before one can use this as Uncle Sam considers the taxpayer's income, ability to pay, asset, and expenses.
Uncle Sam reveals that there are times someone being evaluated or an offer in compromise gets tax liens. This makes it impossible for the taxpayer to sell their property, get a HELOC, or even have their mortgage refinanced.
Making a Request for a Slight Collection Delay
The IRS's belief that the taxpayer "cannot pay" any of the tax debt is what determines the success of this option.
As a part of the qualification process, the taxpayer will fill a form – collection information and also submit any proof as an indication of their present financial statuses like monthly expenses and income if the individual cannot pay for basic necessities like housing, food, and clothing if they pay their bill.
However, taxpayers need to know that if there is a delay in collecting the tax debt, there is a penalty and interest until the debt is fully paid.
Be Careful in Paying Your Tax Bill With Credit
There is also the option to use credit cards to service tax debts organized through a third party. This, however, comes back to higher costs when you consider the interest and convenience fee.
The IRS specifies that the convenience fee of credit cards when it comes to paying tax bills could be up to 1.99%.
In other words, it is not always advisable to use your credit card as a means of tax payment. You should only resort to this approach in specific situations, and even if you do, one needs to be aware of the IRs and credit issuer's interest rate.
There are, however, cases when you might consider using a credit card for your tax bill payment. This is advisable provided that the reward you get is more than the convenience fee, and the card balance is paid completely. However, it is not a good idea to pay your tax bill and still be left with the interest of your credit card company.
Also, the use of personal loans to take care of tax bills might not be very good. If a loan interests you, be sure to consider the loans available from Uncle Sam and compare the interest. Also, be sure that there is a provision for a monthly payment that is within the budget.
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