Four years ago, I started my life as a blogger. I was delighted to be bringing in the extra income, but I didn’t think about the tax implications. As an independent contractor, there were exactly zero taxes taken out of my pay.
That same year, our adjustable rate mortgage adjusted down, resulting in less interest paid towards our mortgage and less deductions to claim on our taxes. Together, those two events resulted in a tax underpayment of $2,000 the following April.
We were still in the first year of our debt management plan, and our budget was extremely tight. We didn’t have the funds to pay, nor did we have a credit card or line of credit to use. I gave the IRS a call, explained the situation, and asked what our options were.
The gentleman on the other end of the phone gave me five priceless pieces of advice:
1. Always file by the deadline
Even if you can’t pay your taxes, you should always file by the deadline. If you don’t, you’ll get slapped with failure-to-file penalties, which equal 5% of the unpaid tax for each month you’re overdue.
2. Apply for an extension
If you can come up with the money to pay your taxes within 120 days, you can apply for an extension. You’ll be charged a failure-to-pay penalty of 0.5% of the unpaid tax for each month (or portion of a month) that the tax remains unpaid. You’ll also be charged interest equaling 3% per year of the unpaid tax.
3. Apply for an installment plan
If you can’t pay within 120 days, you can set up a payment plan with the IRS. There are fees for this, which vary depending on your method of payment. It’s $52 if you’re going to pay through direct debit, or $120 for sending them a check or a payroll deduction. You’ll also be charged failure-to-pay penalties and interest, as with the 120 day extension.
4. If you file, the IRS won’t report you to credit agencies
I was concerned about my payment plan being reported to the credit agencies and showing up as a line of credit. Opening new lines of credit was frowned upon by my debt relief program, and I was afraid it would have negative effects. I was relieved to discover that the only time the government reports anything to the credit reporting agencies is if you completely ignore your tax bill.
5. Figure out why this happened
It’s essential to figure out why you’ve ended up in this situation, then fix it. The IRS doesn’t want to have this same conversation with you next year.
At the end of my twenty-minute phone conversation, I’d learned some great information and set up a 120 day extension to pay. If you end up owing taxes this year, but are unable to pay, know that you have options, then contact the IRS to choose the right path for you.
Have you ever been in this situation before? What did you do?