Last week I wrote a post on what to do with your tax refund, but I also wanted to cover the options available to you actually owe taxes. So first things first, if you owe this year and you didn’t sell a house, take realized gains from stock accounts, have a surge in income, etc. then you need to fill out a new W-4 with your employer, if you already claim 0 exemptions then you may want to request to have a set dollar amount withheld. If you are self-employed you may want to consider making quarterly payments to the IRS.
Save the amount you owe, then file & pay by the deadline. I always advise people to complete their taxes early so if they do owe, they have until tax day to save the money and pay. So if you able to cash flow the amount you owe, do it.
File an extension. You can file an extension for free until October. You will not avoid the penalties and interest but you will have more time to save and pay.
Set up a payment plan. The IRS offers short-term (120-days or less) and long-term payment plans
For the short-term payment plan, it must be set-up by direct deposit and you can apply by mail, phone or online. It’s a free set-up fee and the principal will still accrue interest and penalties.
The long-term payment plan is longer than 120 days and it can be set-up by direct deposit or you can send payment by check or money order. There are also three ways to apply: mail, phone ($107by direct deposit or $225 if you mail in your payment, $43 if low income), or online ($31 by direct deposit, $149 if you mail in your payment, $43 if low income).
Offer In Compromise. This option is a last resort if you owe a large amount that you are unable to pay in full within a certain time period or it would put you in hardship. To submit an offer you must be in compliance with your tax filings and payments and not in bankruptcy proceedings. The IRS has a pre-qualifying tool on their website.
Now, I am not a tax preparer (anymore) or an enrolled agent but I pulled this information directly from the IRS website. If you do owe take action to settle your debt, you don’t want it hanging over your head and you definitely don’t want your wages garnished.
