Whether an accident or a misguided accountant, when you end up owing taxes to the IRS it’s an issue you’ll want to get sorted as soon as possible. While there’s nothing wrong with coming up owing on your taxes, the issues start when you try to ignore the problem. There’s nothing like ignoring the IRS to make a small problem a huge one.
What do I do if I can’t pay my taxes?
If your tax bill comes in and you realize you can’t pay it, don’t panic. It’s important that you still file your return by the deadline even if you don’t have the cash to clear your bill. Filing on time will help you avoid penalties and interest. Once you realize you owe taxes, you should call the IRS to discuss payment options. They can provide short-term extensions or an installation agreement to allow you to pay off what you owe over time. If you do owe taxes, ignoring it or missing the deadline can mean that the IRS will enact penalties against you that could negatively affect you far beyond the initial tax bill.
Here are four reasons you should act quickly when you owe taxes:
- Pay a penalty fee
Failing to file your taxes and failing to pay your taxes is just about the same to the IRS. When either of these scenarios happens, you will get hit with a 5% penalty fee of the taxes owed every month, up to 25%. This can get incredibly pricey, but it’s not the only cost the IRS is going to apply. If you owe taxes that you don’t address, the next thing you’ll have to contend with is interest.
- Pay interest
Mail from the IRS isn’t something anyone wants to receive, but if you avoid filing or paying your taxes, you can expect to start seeing IRS notices in your mailbox. You shouldn’t think that the IRS is “out to get you”. In fact, they’ll give you many chances to remedy the situation before taking action. If you ignore the notice, you’ll only be hit with more fees. If you can’t pay your taxes, you’ll have to pay interest on the amount owed. The interest rate the IRS charges is the federal short-term rate, plus 3%. That rate is set every three months, and the interest compounds daily. You will also have to pay interest on late-filing penalties.
This is just another reason why it’s so important to work with the IRS when you owe taxes. If you’re uncertain what to do, you should hire a tax attorney to avoid the consequences of tax debt.
- Give up your Social Security
If you owe, the IRS can go after certain assets to recoup what’s owed. While they can’t stop you from earning money, seize your work tools, or take some benefits – like those paid to your kids – they can seize your Social Security.
- Receive a federal tax lien
If you don’t work with the IRS to repay them, they can put a federal tax lien on your current and future property. What this means is that IRS is making a claim on your property, including your car, house, accounts, and even wages. This lien can be filed to your employers, your landlord, and your creditors.