According to the agency’s data, the IRS issued 129 million tax refunds in 2021. That leaves 40 million United States citizens who did not receive a refund, either because they broke even or owed money back to the government.
Many Americans count on their tax refund as the most significant check of the year and put the extra money towards savings or use it to pay down debt or cover everyday expenses.
Yet, in the wake of the Covid-19 pandemic’s impact on the workforce, many Americans have found that their tax situation has changed. Whether because of a career pivot or financial stress, this year’s returns may bring an unpleasant surprise: an unexpectedly large tax bill that you can’t cover.
If you have found that you cannot afford to pay what you owe in full upon completing your tax return, you may be wondering: What do you do now?
First, don’t panic — you aren’t alone. In fact, some five million Americans each year require alternative payment options.
The bottom line is that you will have to pay eventually. However, there are options available that can help make your payments manageable, minimize interests and penalties, or even, in some cases, reduce your total bill. Of course, no two situations are alike, so there are no one-size-fits-all solutions to this “taxing” problem. For more personalized advice, consult tax professionals (like us).
However, some options may apply to those who cannot pay their tax bill right away. Read on to discover some ideas.
Even if you can’t pay everything that you owe, filing your return on time and making a partial payment when you do so can be a big step in the right direction, so it’s a good idea to pay as much as you can as early as you can. After all, every dollar you pay reduces the late payment penalty and cuts down on interest charges.
Ignoring the problem won’t make it go away, and no matter what you owe, it’s better to pay a little than to make no payment.
Furthermore, making a payment right away can make you look more favorable to the IRS. If you need to work out a payment plan at some point in the future, the fact that you made a partial payment in good faith may show the revenue officer that they can trust you to follow through with a formal arrangement.
Having said that, however, if you are facing financial difficulties and cannot make even a partial payment, that’s okay, too. Your first priority should be keeping yourself and your family healthy and safe. Nevertheless, you should contact the IRS immediately. In many cases, there are steps they can take to help ease your burden.
Payment extensions are designed for those experiencing legitimate financial hardship. If you can’t pay your tax bill simply because you splurged and spent the money on something like a new TV, the IRS is unlikely to look kindly on your extension request.
It’s also important to remember that you should still file your returns on time even if you need an extension to pay what you owe. Delaying your initial filing will only prolong the issue, not resolve it, and filing late will result in even more penalties.
If you can pay your tax bill over a more extended period of time, a payment plan is one of the best options available. You may even qualify for a self-service, online payment plan (including an installment agreement) that allows you to pay off your outstanding balance over time.
The installment plan is intended for people who need more than 120 days to settle their debt. It requires monthly payments and applies when the amount owed is less than $50,000 (including tax, penalties, and interest combined).
To get started, file Form 965, Installment Agreement Request. You can file it by itself or attach it to your tax return. You can also request an extension using the IRS Online Payment Agreement application instead of filing Form 9465.
If approved, you may have up to 72 months to pay. Take note that the interest and penalty will accrue during this time, although penalties may be abated.
If the amount you owe is between $25,000 and $50,000, you must agree to payments by direct debit and provide bank information. If you owe $10,000 or less, and the IRS agrees that you are not able to pay in full, they will approve your request automatically provided:
If you owe more than $50,000, you must attach Form 433- F, Collection Information Statement, to Form 9465 to determine the monthly payment amount.
An offer in compromise allows you to settle your tax debt for less than the total amount you owe and may be a valid option if you are unable to pay or if paying would create a financial hardship.
The IRS considers your specific circumstances when determining your eligibility, including your ability to pay, income, expenses, and asset equity.
Generally, they will approve an offer in compromise when the amount offered represents the most they can reasonably expect to collect in the near future. However, this process is long, complicated, and not cheap in and of itself, considering application fees. What’s more, the IRS rejects most offers of compromise. If you are in any way capable of paying your tax debt in full, they are unlikely to approve you. Therefore, you should explore all other options first and consider this a last resort.
If the IRS agrees that it would not be possible for you to pay your tax bill and your living expenses at the same time, they may place you into something called “currently not collectible” status.
Generally, this means the IRS won’t try to collect your debt until after your financial situation improves. However, this is just a temporary label; eventually, you will still need to pay your liability.
When it comes to paying your taxes, the rule of thumb is: Better late than never!
Late fees, interest, and penalties will only increase, so it’s generally better to pay it immediately than continue to delay no matter how overdue your payment is. If you are proactive and set up an installment plan, the IRS may even choose to lower your monthly penalty.
On the other hand, if you do not make any effort to settle your debt, you could find yourself subjected to IRS enforcement actions, such as garnished wages, liens on your property, or worse.
Long story short?
It is always better to approach the situation the right way no matter your circumstances.
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Above & Beyond
New York City
2 West 45th Street, Suite 1208
New York, New York 10036
565 Taxter Road, Suite 105,
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Jeff Coyle, CPA, Partner of Rosenberg Chesnov, has been with the firm since 2015. He joined the firm after 20 years of business and accounting experience where he learned the value of accurate reporting, using financial information as a basis for good business decisions and the importance of accounting for management.
He is a diligent financial professional, able to manage the details and turn them into relevant business leading information. He has a strong financial background in construction, technology, consulting services and risk management. He also knows what it takes to create organizations having built teams, grown companies and designed processes for financial analysis and reporting.
His business experience includes:
Creating and preparing financial reporting, budgeting and forecasting.
Planning and preparation of GAAP and other basis financial statements.
Providing insight on financial results and providing advice based on those results.
Jeff also has a long history of helping individuals manage their taxes and plan their finances including:
Income tax planning and strategy.
Filing quarterly and annual taxes.
General financial and planning advice.
Prior to joining the firm in 2015, Jeff was in the private sector where he held senior financial and management positions including Controller and Chief Financial Officer. He has experience across industries, including construction, technology and professional services which gives him a deep understanding of business.
Jeff graduated from Montclair State University, he is a CPA and member of the American Institute of Certified Public Accountants, New York State Society of Certified Public Accountants and New Jersey State Society of Public Accountants.
Jody H. Chesnov, CPA, Managing Partner of Rosenberg Chesnov, has been with the firm since 2004. After a career of public accounting and general management, Jody knows the value of good financials. Clarity, decision making, and strategy all start with the facts – Jody has been revealing the facts and turning them into good business results for more than three decades.
He takes a pragmatic approach to accounting, finance and business. His work has supported many companies on their path to growth, including helping them find investors, manage scaling and overcome hurdles. His experience and passion for business reach beyond accounting and he helps businesses focus on what the numbers mean organizationally, operationally and financially.
He has a particular expertise in early-stage growth companies. His strengths lie in cutting through the noise to come up with useful, out of the box, solutions that support clients in building their businesses and realizing their larger visions.
Prior to joining the firm in 2004, Jody was in the private sector where he held senior financial and management positions including General Manager, Chief Financial Officer and Controller. He has experience across industries, which gives him a deep understanding of business.
Jody graduated with a BBA in Accounting from Baruch College, he is a CPA and member of the American Institute of Certified Public Accountants and New York State Society of Certified Public Accountants.
In addition to delivering above and beyond accounting results, Jody is a member of the NYSCPA’s Emerging Tech Entrepreneurial Committee (ETEC), Private Equity and Venture Capital Committee and Family Office Committee.
He is an angel investor through the Westchester Angels, and has served as an advisor for many startup companies and as a mentor through the Founders Institute.
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