4 Steps to Pay Off Your Income Tax Bill

The ultimate tax question: what should I do if I owe taxes to the Internal Revenue Service (IRS)

Discovering you owe more than expected can leave you feeling defeated. Not getting a tax refund is bad enough, but finding out you owe a lot of money is even worse.

Fortunately, you can pay off or resolve that tax bill by following these steps.

1. How Much Do I Owe The IRS

Use this free tax refund estimations to get an idea if you will owe the IRS this tax season. Of course, you won’t know exactly how much you owe until you complete your tax return.

Read your completed tax return carefully, and look to see if you actually owe the government money.

If your tax return doesn’t show a deduction or credit you thought you qualified for, make sure you answered all the questions correctly.

One missed question or checkbox can cause you to miss out on tax benefits you may be entitled to.

Another way to determine if something is amiss is to compare this year’s return to your tax return from last year. If your tax situation has not changed drastically, but your tax bill has, that’s a red flag to find out why.

If you owe money because you received a letter from the IRS, don’t automatically assume the IRS is correct.

They make mistakes, too. Call or write to the IRS for clarification at below communication number.

Individual - 1-800-829-1040 & Business-. 1-800-829-4933.

2. Minimize Penalties and Interest

Large tax bills are worse if you have to pay penalties and interest on top of the original amount owed. Luckily, you can minimize these extra charges in three ways:

Exceptions to underpayment of tax penalties

If you underpaid your taxes this year but owed considerably less last year, you typically don’t pay a penalty for underpayment of tax if you withheld at least as much as you owed last year. That, of course, is only true if you pay by the due date this year.

AO Tax can help determine your penalties and interest. You may also reduce your penalties and interest using the annualized income method if you received more of your income in the latter part of the year.

Ask for an abatement of penalties

The IRS often reduces or removes penalties and interest on the penalties if a taxpayer writes a letter explaining the situation.

For example, if you had an unusual tax event, you made an honest mistake, or you or your spouse had a serious illness, the IRS may waive the penalties.

Be sure to ask for an “abatement” in your letter.

Pay as quickly as possible

If you owe tax that may be subject to penalties and interest, don’t wait until the filing deadline to file your return.

Send an estimated tax payment or file early and pay as much tax as you can.

Even if you choose to file an extension, any taxes owed are still due on the filing deadline. Therefore if you don’t pay by April 17, you are subject to those extra penalties and fees.

3. What If I Can’t Pay My Taxes

If you can’t pay your tax bill by the time it is due, don’t avoid the bill. File Form 9465, Installment Agreement Request, to set up installment payments with the IRS.

The IRS must allow you to make payments on your overdue taxes if:

• You owe $25,000 or less, or
• You prove you can’t pay the amount you owe now, or
• You can pay off the tax in three years or less.

Additionally, you must agree to comply with the tax laws and not have had an installment agreement with the IRS in the past five years.

4. Offer in Compromise

You’ve probably heard ads for experts promising to help you settle your IRS bill for less than you owe. It’s true that the IRS will negotiate back taxes through an Offer in Compromise (OIC).

However, you’ll have to offer at least as much as your net worth – which is everything you own, reduced by your debt. An OIC is a lot like bankruptcy – you should only use it as an extreme last resort.

What Not To Do

Don’t put your tax bill on a high-interest credit card.

The IRS charges a far lower interest rate than credit card companies. That means you can spend more of your money paying off the balance instead of just keeping up with the interest.

Don’t take money out of your retirement accounts to pay a tax bill.

If you withdraw money from a retirement account, you may end up owing a penalty, in addition to income taxes, on that amount. By the time you pay the penalty and income tax, you won’t have as much left to pay your previous tax bill as you thought. Besides, retirement accounts are for retirement!

Don’t panic!

If you play by the rules, stay in touch and are scrupulously honest, the IRS can be a fairly reasonable creditor.

Do everything you can to resolve and pay off your bill, and they won’t be your creditor for long.

By Syed Hussain – Associate Manager AO Tax

For Tax Year 2017.