If you owe the IRS money, you should trust that they know about it and are expecting prompt payment. The agency is not known for backing down when there's tax money to be collected, and you shouldn't count on qualifying for an offer in compromise to reduce your tax bill.
Unfortunately, there are always those who want to hide their heads in the sand, thinking that if they ignore it, it will go away.
No such luck. Here’s what else you should NOT do if you owe the IRS.
File Late or Not File At All
Filing late because you don’t have everything together does nothing more than increase the amount you eventually pay. The IRS charges a failure to file penalty of 5% of the amount you owe for each month you are late. If there’s any good news, it’s that the penalty is capped at 25%. However, paying an additional quarter of the amount of taxes doesn’t make things any better.
At the very least, file for an extension by Tax Day if you are not ready to file your return. Requesting an extension gives you extra time to get your return completed accurately, and you won’t incur a failure to file penalty if you request the extension before the April deadline.
That being said, if you can’t pay your taxes in full, you will incur a failure to pay penalty on the outstanding balance.
Fail to Pay
Like failing to file, failing to pay increases your tax bill. If it’s any consolation, the penalty is lower - 0.5% of the balance up to 25% for every month you are in arrears. However, if you skip paying your taxes, you are committing a crime. It’s a misdemeanor, which doesn’t sound bad, but you can be fined up to $25,000 for each year you are delinquent.
If you ever wondered how back taxes can grow so fast, there’s your answer. Oh, you could also get sent to prison for up to a year. Probably not the way you want to spend your vacation.
Refuse to Set Up a Payment Plan
Uncle Sam isn’t a complete ogre. The IRS has several payment options available to you if you can’t afford to pay your entire tax bill at once. If you don’t take advantage of a payment plan, you are shooting yourself in the foot.
You may be eligible for an installment or another type of payment plan if you owe less than $50,000 in income taxes, penalties, and interest. Even if you don’t qualify because you owe too much, you can apply to your local IRS office for other options. Just fill out and mail Form 9465.
Depending on the plan and the amount of your tax bill, you may have up to 72 months (5 years) to pay your tax debt in full. Remember, though, that you will continue to accrue penalties and interest until the balance is paid off.
If you are owed a refund during the time you are paying off taxes under a multi-year installment plan, the IRS can apply it to your tax bill, reducing the amount that way.
If you are unable ever to pay off the entire amount, you may be eligible for an offer in compromise, in which you pay a fraction of your tax bill and the IRS calls it even.
Neglect to Compare Your Payment Options
If you decide to pay your taxes some other way than applying for an installment plan, make sure you know how much each option costs you in the long run. Some taxpayers choose to pay using a credit card, a home equity loan, or a personal loan.
While those payment options will take care of your tax bill all at once, you need to add up how much you wind up paying in interest, fees, and repayment terms for each option. Not all payment options are the same. Tread carefully and read the fine print.
But Wait - Maybe You Have “Reasonable Cause”
Actually, there are some times when the federal government cuts you some slack. However, you need to be able to prove you are covered by a reasonable cause. Reasonable cause includes:
- Fire, casualty, natural disaster, or other disturbance.
- The inability to obtain records (maybe because of the first reason).
- Death, serious illness, incapacitation, or unavoidable absence of the taxpayer or member of the immediate family.
- Other reasons establishing you used all “ordinary” business care and prudence to meet your tax obligations by were nevertheless unable to do so.
Be ready with court records, a physician’s letter, or other documentation for proof. None of these gets you completely free of taxes. You still have to pay for every year you missed, but you might be able to get a waiver of the penalties.
If You Owe, the IRS Will Let You Know
- The IRS will first contact you with a letter.
- You receive at least two billing notices from the IRS.
- Only then does the IRS begin a collection process if you do not respond and set up payment.
The IRS does not email you, text you, or call you on the phone. It will always begin to conduct business by mail. Of course, scammers have figured this out, so if you have any doubts about a communication you receive that purports to be from the IRS, don't hesitate to contact your local IRS office to check it out.
There Are Other Ways to Make You Pay
The IRS has other carrots and sticks up its sleeve can help convince you of the wisdom of paying your tax debts.
- Your passport can be canceled. Good-bye, European vacation.
- The IRS may place a lien against your property, typically your home if you own one. You won’t be able to sell it unless you cut a deal with Uncle Sam.
- Your wages could be garnished until your balance is paid. You might have to cut back on a few expenses if this happens.
Just so you know, the IRS has up to six years to press criminal charges. And there is no limit on how long they can spend chasing down unpaid taxes.
Now, do you get it? Do you understand what you should not do now? If you owe the IRS, get it taken care of with all due haste. File an extension to avoid failure to file penalties. Get a payment plan set up if you can't pay in full.
If you need help because this is all just too overwhelming, contact Top Tax Defenders. You’re not alone.