While it’s fun to imagine getting money back from the government after filing taxes, unfortunately, it doesn’t always go that way. If you have underpaid your taxes, no longer qualify for particular deductions or have undergone a big life change, you could actually owe money back to the government — which is far less fun.
If you find yourself with a tax liability this year, here are a few things to keep in mind — including solutions to help you avoid penalties.
If you can pay your tax bill…
Pay it off.
If you have the money and can handle the payment, it’s usually best to just pay so you can financially move forward. You usually have until April 15, 2024 to settle your bill, which is when most owed taxes are due. You can pay directly from your bank account or through debit or credit cards at Irs.gov/payments.
Prepare for next year.
After dealing with 2023 taxes, look ahead to 2024. Is there a way to withhold more from your paycheck? Could you pay quarterly taxes as an independent business or contractor? While some tax circumstances are unavoidable — such as an inheritance — look at changes you can possibly make to avoid a surprise tax bill next year.
Start an emergency fund for next time.
Emergency funds are designed for unexpected expenses, like unemployment, home repairs and yes, tax bills. With your tax liability taken care of, consider putting extra money in an emergency fund, so you’re better prepared for next year. Consider a high-interest savings account for added value, and other ways to save and generate income.
If you can’t pay…
Consider a payment plan.
The IRS makes it easy — or easy-ish — to take a little extra time getting your tax payment together, and offers two different options. For both plans, you can apply by phone or online. Just keep in mind both short and long-term payment plans come with an interest rate, and non-payment penalties.
Short-term payment plan.
If you are certain you can pay your taxes in a short amount of time, and owe less than $100,000, consider a short-term payment plan. This plan is easy to set up, and you’re withdrawing directly from your checking or savings account or paying by cash, money order or debit or credit card.
Long-term payment plan.
If you need more than 180 days to settle your tax liability, a long-term payment plan could be the right choice — just keep in mind it comes with more fees. This option is available to taxpayers who owe less than $50,000, and gives more than 180 days to pay via monthly installments. It costs $31 to set up online ($107 over the phone or in person) if you’re pulling directly from your checking or savings account for your monthly payment.
*If you are a low-income taxpayer, the IRS sometimes waives user fees as long as you are withdrawing directly from your bank account. If you can’t make electronic payments and need to opt for another payment method, the IRS may refund the user fee when you have paid in full.
Apply for an offer in compromise.
If you’re absolutely sure you don’t have the money to pay your tax debt, you can apply for an offer in compromise (OIC), which means that the IRS will examine factors like income and expenses and potentially allow you to pay less than the amount you owe. Keep in mind approval rates are low — only 1/3 of applicants are granted an OIC — but if you’re approved, you can commit to paying the new amount in five months, or paying in installments over two years. The application fee is $205, though it’s often waived for low-income taxpayers.
Most importantly…
Be cautious about taking out more debt.
While a quick and easy solution seems to be taking out a personal loan to pay your tax liability, it’s often best to avoid. The IRS payment plans and fees usually add up to far less than those of a personal loan, and if you have trouble paying it back it not only leads you further into debt, but can also damage your credit score.
Take it seriously.
Above all else, don’t ignore your tax bill; consider paying it off as soon as possible. There are a wide range of penalties that the IRS can institute if you don’t, including canceling your passport, freezing your bank account, seizing assets or putting a lien on your home — all consequences that would cause deep problems that could last for an extensive amount of time.
If you owe money for your 2023 taxes, it’s best to take it seriously, pay it as soon as possible, and examine what you can do moving forward. That way, you can potentially avoid any penalties — and hopefully not be in the same situation next year.
DISCLAIMER – This content is for informational purposes only, it may become outdated, and we make no representations or warranties as to its reliability or applicability to your situation. Enova, Pangea and its affiliates do not provide tax, financial, legal or accounting advice. You are encouraged to contact your financial or tax advisor for more information.
