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?
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You can always talk to the tax authorities, they do not want to overturn you and your finances, they want to help you so they can get into more in taxes from you in the future. But do it in time and not be late.
Very true, Property Marbella – When you think about it, it makes sense. For those having some financial difficulties, it helps both the government and the person owing taxes to have some way to work out a method by which the taxes get paid. Always great to hear from you!
I’m looking at have to pay a little over $3,000 in tax this year and I’ll definitely be asking for a payment plan. This will actually be the first time I’ve ever had to pay a bill.
Great list of tips.
Sorry to hear about your tax bill, Mr. Iknz – make sure you go back and figure out what can be changed so that you don’t run into this situation again next year. Thanks for dropping by!
Great tips, Travis! #5 is especially important – I had a big tax bill a few years ago and immediately investigated why. Turns out my withholdings were off, so I upped them and haven’t had to pay since.
Exactly, Kendal….you don’t want this to happen over and over again and be in a perpetual state of making a monthly payment towards last year’s taxes. Glad to hear you fixed your withholding and got everything straightened out for future tax years. Thanks for your thoughts!
Good to know we have options when it comes to paying taxes. Thanks for sharing your story!
You’re welcome, Alex! I had no idea that there were options available until I gave the IRS a call and told them my situation. The guy at the other end of the phone was super nice, and helped me figure out the best way to proceed. Very unlike the general perception of what the IRS has!!!
So glad you were able to get it worked out like this Travis. I would’ve been so tempted to avoid it, but this is proof that dealing with the situation head on was the best course of action to take!
Avoiding the tax bill is the absolute worst thing you can do, John. Failure to file, and failure to pay penalties plus the interest will add up fast. As with any problem in life, the best thing to do is to face your problems head on and just start working towards a solution. Thanks for stopping by!
An unfortunate topic, but a great approach to it! This is my first time around with quarterly taxes and I am putting it into high gear to make sure I don’t have to make use of any of these options. It’s really great to know I have them, though!
The best course of action is to be proactive – which it sounds like you’re doing, Sarah….good for you! It is nice to know that there are options out there if the unexpected happens though. Thanks for sharing your thoughts!