How to Pay Off Your Tax Debt
Taxes are stressful. So is being in debt. What do you get when you combine these two anxiety-inducing elements of life?
A tax debt nightmare.
When you find yourself in the unfortunate circumstance of owing money to the IRS, you might be tempted to start living somewhere off the grid. But don’t worry. We’re here to teach you how to pay off your tax debt in a few simple steps!
#1 Check Your Work
Realizing you owe money to the IRS is a horrible feeling. Thus, if you file your return and see that you’re in the red, it’s crucial to triple check your returns to make sure everything is correct. This is especially true if your return looks radically different than it did in previous years, despite staying at the same job, or not having any substantial changes to your tax situation.
Before you start chipping away at paying off your tax debt, take these precautionary steps:
- Go over everything (and then go over it again) – A misplaced decimal point or an extra zero in your return could cause serious problems. Don’t put yourself through this stressful process only to find out later that you made a careless error. You’re human. Mistakes happen.
- Call the IRS – They might not be on the top of your list of people to call right now, but if they made a mistake on your return, you need to address it. Believe it or not, the people working at the IRS are human too!
- Amend, Amend, Amend – If you did find errors on your return, you’re going to have to do a little damage control. To amend your return, you’ll need to fill out a form called a 1040X, and mail it to the IRS (even if you filed electronically). This might be a bit of a hassle, but it’s better than paying back money you don’t actually owe.
Now, if you really do owe the IRS money…
#2 Mitigate the Damage
Once you’ve done your due diligence and determined that unfortunately, paying back taxes is unavoidable, the next step is to do everything you can to minimize how much it’s going to cost you.
Research due dates, penalties, and interest rates to learn how you can avoid racking up even more tax debt. Interest on tax debt adds up quickly, and the IRS is notorious for taking measures like issuing liens and levies on property to ensure payment.
#3 Make a Plan
The next step is the most important, and by far the most difficult. You need to pay the money back. In a perfect word, you’d be able to pay off your debt in one lump sum. However, the reality is you might not be able to afford to do so, especially if you owe a significant amount.
If you can’t pay in full, consider these payment options:
- Offer in Compromise – If you can prove that you absolutely cannot afford to pay off your tax debt because it would cause you extreme financial hardship, the IRS will sometimes cut you a break.
- Installment Plans – Uncle Sam can be surprisingly easy to work with in terms of setting up an installment plan. By asking for either a long-or short-term payment schedule, you’ll be able to spread the financial burden out over time, making it easier to manage.
- Currently Not Collectible – If you successfully file for “currently not collectible” status, the IRS will grant you about a year until you have to pay off your debt. You still will inevitably have to pay back everything you owe, so use this grace period to plan and save, save, save.
#4 You Know What They Say About Death and Taxes
Unfortunately, they’re inevitable. This means that tax season is going to roll around again next year, and you want to avoid finding yourself in the same predicament.
Keep your finances organized and reflect on the mishaps that landed you in tax debt in the first place. When it comes to dealing with the IRS, prevention is the best course of action, so use the upcoming year to learn from your past tax-related mistakes.
It’s Time to Take Action
Hopefully, you’re starting to feel a little better about the prospect of paying off your taxes. Now that you have the tools you need, it’s time to get started. The sooner you begin, the sooner it will be over!