Finding out you owe back taxes can be a scary proposition no matter the situation. The fact is that, should you fail to pay all of the back taxes you owe, the IRS can put a federal tax lien on your property. Luckily, the IRS is usually willing to work with people, which means there are generally a number of ways that you can avoid a federal tax lien even if you’re unable to immediately pay everything you owe. With this in mind, here are five tips you should keep in mind if you think you may owe back taxes.
File Any Past-Due Returns Immediately
One of the main reasons that people end up owing back taxes is because they fail to file their tax returns for a specific year. Of course, simply failing to file your returns doesn’t mean you’re not liable for any taxes you owe. Therefore, one of the best things you can do in this situation is to file any past due tax returns as soon as possible. The longer you wait to file, the bigger the interest charges and late payment penalties can be, so it is imperative that you take this first step as soon as possible.
Pay Whatever You Can Now to Minimize Penalties and Fees
Although it may sound obvious, the biggest tip for anyone who currently owes back taxes is to pay everything you can immediately. This is true even if you’re unable to pay the full amount you owe since even paying a small amount will lessen the amount of fees and late payment penalties you face. In this sense, if you don’t have the ready money in your account to use the IRS Direct Pay option, you might want to consider using a credit card or taking a loan to pay your back taxes before they accumulate even larger fees.
Gain Some Time by Applying for a Short-Term Extension
If you find yourself unable to immediately pay everything you owe in back taxes, applying for a short-term extension will allow you a bit more time to come up with the money you need. Applications can be submitted online or by calling the number listed on your IRS bill, and if you’re approved, you’ll receive a 120-day extension. This can be a huge help since it allows you to avoid any late payment penalties as long as you can pay the full amount in 120 days or less.
Sign Up for a Monthly Payment Plan
Signing up for an IRS payment plan is another option that can help you avoid late payment fees and penalties. Also known as an IRS installment agreement, this plan allows you to make monthly payments so you can slowly pay off your tax debt over time instead of having to come up with all the money at once. However, it is important to note that long-term payment plans are only available for individuals who owe less than $50,000 in combined back taxes, penalties and interest, and you must have filed all necessary tax returns to qualify.
Settle Your Tax Debt with an Offer in Compromise
If you’re unable to pay your back taxes in full or doing so will likely cause you financial hardships, there is one final option that can still allow you to bring your taxes in order. Under these specific situations, you can apply for what’s known as an offer in compromise, which basically means entering into an agreement with the IRS whereby you can settle your tax debt without having to pay the full amount. The exact offer the IRS will give you depends on a number of different factors and is generally determined to represent the highest amount that the IRS thinks it can collect from you in a reasonable amount of time.
Ultimately, finding a way to pay your back taxes is one of the most important things you can do to protect your financial future. The late payment penalties and fees alone can quickly add up to a huge amount of money if you don’t immediately take action. Moreover, the consequences of having a federal tax loan put against your property can be even greater. Therefore, it is essential that you do whatever it takes to start getting your tax affairs into order today.