If you receive a tax bill for more than you anticipated, your first instinct is to panic. Of all of the people to whom you could potentially owe money to, the dreaded IRS is one of the most terrifying. They will expect to be prioritized above other debts, because they have powers that other credit lenders do not have. Here are some options for facing up to the situation and finding the extra money to pay off the debt.
1. Don’t postpone sending your tax return. If you can’t pay an unexpected tax debt, it’s tempting to put off sending your tax return. Unless the IRS can prove that you are intentionally trying to get out of paying your tax bill, they can’t prosecute you for not paying your tax bill. If you delay sending your tax return or don’t submit it at all, you risk the IRS putting you into the tax-dodging category.
2. Re-plan your debt repayments. A tax debt may be the newest debt that you’ve gained, but that doesn’t mean that it should be put at the bottom of your priority list. The IRS will expect you to put a tax debt before any other debts, even if this means falling behind on other debt repayments or racking up more debt to pay it off. This will require you to re-evaluate any debt repayment plans that you already have in place.
3. Consider Offer In Compromise agreements. If you’re already struggling to make ends meet and won’t be able to repay your tax debt without sliding into severe financial difficulties, an Offer in Compromise agreement may be the answer. To apply, you need to fill in the IRS Form 656 Offer In Compromise application form and detail how dire your situation would be if you were forced to repay your tax debt in full in the near future. If you’re approved for an OIC Agreement, you’ll need to offer a series of fixed payments or one lump sum towards the repayment of your tax debt in line with the maximum that you can afford to offer. Getting the IRS to agree to these agreements is VERY rare, so don’t count on it, but they will agree to an OIC if you have absolutely no assets and no real hope of drastically increasing your income.
4. Look for temporary additional income. You may want to look for a part-time or weekend job to help you get together enough extra cash to repay your tax debt. If that’s out of the question, try selling some stuff on eBay, Craigslist, or in a garage sale to scrounge up enough money to repay the tax bill.
5. Look at streamlined installment plans. If you are running out of other options for repaying your tax debt, you can apply for a streamlined installment plan through the IRS Form 9645 Installment Agreement Request. The IRS will use the information given on this form to decide whether to offer you the opportunity to pay off your tax debt in regular installments over a period of five years (with interest added on top). To qualify, your debt needs to be less than $25,000 and you need to have the means of repaying it (plus interest) within the five year period. There is a $102 charge if you’re approved, which is usually deducted from your first installment repayment.
6. Use your credit card(s). If the tax debt isn’t too significant, you may consider using your credit card to pay it off. This may increase your credit card debt, but it will leave you free to focus on paying your card(s) off without having to worry about when the IRS will come calling. However, this should only be a last resort option!
Above all, it’s vital to get in touch with the IRS as soon you realize that you’re in a position to fully pay off your tax debt. They can offer advice on the best repayment option and if nothing else, it signals to them that you are not purposefully dodging the repayment and willing to work with them.