The IRS can be scary to deal with especially if you end up owing them money on your tax return. The IRS has an immense authority over our financial lives and that can be nerve wrecking when you have to pay. There are many solutions other than filing for bankruptcy, if you owe the IRS money.
When owing the IRS money, the first step is to file your tax return on time. If your tax return is not filed before the deadline and you owe the IRS money, the IRS will charge you an additional 5% interest rate of the unpaid balance each month. The IRS can charge up to a 25% interest rate penalty. This makes it an undoubtedly wise decision to file your taxes on time even if you owe money. The next step would be to pay your taxes but let’s say you filed and didn’t pay your taxes; the IRS will charge you a penalty of 0.5% of the unpaid amount each month. The IRS also charges an interest rate of 3% on top of the federal short-term interest rate, which could end up being roughly a 4% interest rate they charge you on the amount of money you owe.
When your taxes go unpaid, it is equivalent to taking out a short-term loan from the IRS and sometimes it can be very expensive. If the IRS goes unpaid for too long, then they will start to take immediate action financially. Which could result in the IRS taking money from your paycheck before it even gets to you. It is also known as garnishing your wages. The IRS can also take your assets as a payment or they can put a lien on your properties. If a lien is placed on your property it can’t be sold without paying back the IRS first and it is automatically recorded on your credit report. Tax liens are one of the worst notes that can be placed on your credit report. It is less stressful to pay your taxes than it is to let your taxes go unpaid. If you don’t have the money to pay back your taxes owed to the IRS immediately, then a few options are to take out a short-term personal loan, using your credit card, or to set up a payment plan through the IRS.
Paying off your IRS debt with a short-term personal loan can be a wise decision. The interest on the loan will most likely be lower than the interest rate from the IRS plus the penalty they charge you for. If you have a better credit score, then it will help with a lower interest rate on your loan. A benefit with a personal loan is that you don’t have to worry about the IRS garnishing your wages, filing a tax lien on your property, or selling your assets. You have to make your monthly payments on your loan or else you’ll end up in a financial crisis.
Using your credit card to pay back your tax to the IRS can reward you by helping you earn rewards such as cash back or travel bonuses if you use a rewards credit card. The downside to using a credit card is paying the processing fee and if you don’t pay the balance on the date it’s due then you will end up paying an interest rate that can be higher than a personal loan interest rate. The processing fee can range from 1.87% to 2.25%. Paying with a credit card will raise your debt utilization ratio, it is what your credit card balance is compared to your overall credit card limits, which is a crucial part of your credit score.
The third solution is to acquire a payment plan through the IRS. The IRS offers qualifying taxpayers up to 120 extra days to pay the full amount owed. You can request for an installment plan and make monthly payments to the IRS. If you choose to request an installment plan, you will have to pay a fee of $43. If the tax you owe will make you unable to meet your basic living expenses, then you may qualify for a delayed payment. All of the payment plans the IRS offers, subject to fees and interest.
Owing the IRS money is stressful and tough to handle but you have options that can make it easier to handle. Make sure you have a secure plan that fits your financial needs so you don’t suffer from severe consequences from the IRS.
We are not financial advisors and therefor are not giving any financial advise. Before implementing any of the tips on this website, please consult with a financial planner to ensure it makes sense for your individual financial situation.