It’s that time of year again. Your friends are paying off credit card balances, buying new TVs and going on luxurious vacations with their tax return money.
You didn’t get so lucky. You’re left behind saying, “Sorry guys, I’d love to hang out, but the IRS sent me a bill.”
You filed your tax return but didn’t send the money the IRS claims you owed with it. Now, you owe them money.
You may dread following up with the IRS, but keep reading for tips on how to resolve that tax bill quickly.
The IRS Sent Me a Bill – Now What?
When you receive a bill from the IRS you shouldn’t panic, but you do need to respond quickly. The IRS charges penalties and fines on unpaid debts. The longer you wait, the more you’ll owe.
You should start by making sure the IRS hasn’t made a mistake.
Make Sure You Actually Owe Money
Don’t immediately send payment when you receive a bill from the IRS.
Does the IRS make mistakes? Sure, everyone makes mistakes and the IRS is not exempt from that.
If you think the IRS is wrong, you should contact them as soon as possible. It’s a good idea to go into this conversation with a written explanation of why you think the bill was sent in error.
Make copies of any relevant documents (previous tax returns, receipts, past payments, etc). You should always hold on to any originals unless they specifically ask you to send them. Anything you send to the IRS may be out of your possession forever.
Be sure to keep good records and any communication between you and the IRS. Take notes during phone conversations and keep any other correspondence, just in case.
In your notes, jot down the name of each person you speak with, any contact information, and summarize the conversation.
Call if You Have Questions
Letters from the IRS can be lengthy, long-winded, and confusing. There is no shame in calling for an explanation if you are confused or think the bill was sent in error.
Calling the IRS is the fastest way to get in touch with them and figure out exactly what the problem is. Knowing exactly the situation you are in will reduce some of your anxiety.
Decide if You Can Pay
If you owe the IRS $3000 and you still have bills to pay this month, chances are you don’t have enough in your checking account to settle your bill immediately.
You should never pay your tax bill before ensuring that your own basic needs are met.
Don’t let your other financial priorities fall to the wayside. There are options if you can’t pay in full.
If You Can’t Pay in Full
The IRS requires that all balances are paid in full in a timely manner. You will be hit with a late penalty of .5 percent each month the bill is left unpaid. That penalty amount increases each month until it reaches 25 percent of the total tax debt.
And as if that isn’t enough, the IRS charges interest on the money you owe, penalties, and interest of 3 percent per year. This interest is compounded daily.
If you can’t pay your balance in full, you can arrange an agreement directly with the IRS.
If you don’t feel like dealing with the IRS, there are also other ways to pay.
Ask About an Abatement of Penalties
If you can write a letter that explains your specific situation, the IRS will often reduce or remove penalties. For example, if you have made an honest mistake or have been experiencing a life crisis, it may be worth asking for an abatement.
Monthly Installment Plan
You may qualify for a monthly payment plan arranged by the IRS. To request an installment agreement, you have to find the IRS Form 9465 online and submit it to the IRS by mail.
Form 9465 is fairly simple. It gives you the ability to suggest your own terms for repayment. You will know whether or not the IRS approves your request in 30 days.
Request a Short-Term Extension
In some cases, the IRS will give taxpayers up to 120 days to pay their balance.
While there is no fee to request an extension, you will still be responsible for the .5 percent penalty per month until your balance is paid.
This is convenient if you only need a short reprieve to pay your bill.
Offer in Compromise
There is another option called an “Offer in Compromise.” This is when an expert negotiates with the IRS on your behalf.
Yes, it sounds great, but an Offer in Compromise is similar to bankruptcy. It should only be used as a last resort.
What Not to Do
Some experts and information online will tell you to pay off your debt with a credit card or dip into your retirement account. This is never a good idea.
Credit card companies typically charge a higher interest rate than the IRS. Sure, it is a convenient option, but you will spend more money than is necessary in the long run.
You can be penalized if you withdraw from a retirement account early. Plus, you owe income tax on what you take out. By the time you resolve the penalty and pay your back taxes, you will have lost more money.
You should also think twice before applying for a personal loan unless this comes from a close friend or family member. Fees and costs vary wildly, but you are likely better off working with the IRS directly.
Get Legal Help
Don’t sit around thinking, “The IRS sent me a bill. I can’t pay, so I’m doomed.”
Don’t panic! As long as you reach out early for an explanation and ask for help, the IRS is usually fair and willing to help you work it out.
If you can demonstrate that you are doing everything you can to pay off your bill, you will be out of this situation in no time.
If you’re still confused, don’t hesitate to seek legal help. Contact us today for a free consultation.
