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4 Tips if You Owe Money to the IRS

{ Posted on Apr 17 2010 by Marcus Alston }

Over 70% of tax filers get a tax refund from the Internal Revenue Service (IRS) each year, but what do you do if you are among the 30% that do owe taxes?

About 15 years ago I took the advice of one of my co-workers and increased my exemptions so that I would increase my take home pay under the theory that you do not want to get a refund because that means Uncle Sam has had use of your money interest free.  I ended up owing over $1,000 that year and at tax time it hurt.  It caused me to tap my savings and I ran up a small credit card bill for certain purchases.  Needless to say, that was the last time I did that.  If you find yourself in the situation where you owe Uncle Sam, here are a few tips.

1.  Plan Ahead for Next Year so that You Do Not End Up Owing.  If you do not like owing money to the IRS at tax time, consult an accountant or tax advisor and consider reducing your exemptions so that your take home pay is reduced and Uncle Sam ends up keeping more of your money during the year so that at tax time you will owe less or maybe even get a refund.  I encourage aiming for a tax refund because refunds offer several financial benefits.

2.  Pay the Bill in Full Using Your Existing Funds on Hand.  This is the simplest way to deal with debt.  Simply pay in cash.  The down side is that you may deplete your savings or not have the funds to pay.  If you have the funds, this usually makes the most sense.  Hopefully the payment was anticipated in your budget.

3.  Installment Agreement.  You may request an installment agreement if you cannot pay the amount you owe in full.  This is an agreement between you and the IRS for the collection of the amount due in monthly installment payments.  The agreement is usually for a period of no longer than 3 years.  The IRS states that to be eligible for an installment agreement, you must first file all returns that are required and be current with estimated tax payments.  If you owe over $25,000, additional requirements apply and you may need to consult at accountant or other advisor.  If an agreement is approved, a one-time user fee will be charged, plus interest.

4.  Pay by Credit Card.  Not an option I like, but this may be a real possibility if you do not have cash on hand to pay the debt.   The IRS states that the interest rate on a credit card or bank loan may be lower than the combination of interest and penalties imposed by the Internal Revenue Code.  However, you may pay a higher interest rate on a credit card than with an installment agreement and there is a fee of 2-3% for paying taxes by a credit card.

Conclusion. Consult a tax professional and do your own research on all your options.  There may be other options available in addition to the ones listed above such as a deferment (must show financial hardship) or a reduction (must make the financial case) in the amount of taxes you owe  to the IRS.    Also, consider speaking to the IRS about all the options available to you, but be aware that their ultimate goal is to get you to pay, not to accommodate your financial situation.

For more information about payment options visit the IRS Web site at IRS.gov.

What are your thoughts?  How would you pay the IRS if you owed them money?  Other thoughts?  Please comment below.

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