What to Do If You Owe Taxes

Finalizing your tax return and realizing you owe cash to the IRS may cause a shock to the system, particularly if the quantity is bigger than you anticipated. Whereas the perfect state of affairs is to easily pay money by the April 15 deadline, that’s not all the time an possibility for everybody.

Earlier than you do anything (together with procrastinating on submitting that tax return), learn these 5 guidelines on tips on how to deal with tax debt. They may prevent quite a lot of stress and possibly even just a little bit of cash. 

Rule #1: File your tax return anyway

One of many greatest monetary errors you may make will not be submitting your taxes on time. Even when you’ve got a shock tax invoice, don’t be tempted to attend on submitting. For those who do, you’ll need to pay a hefty 5% failure to file penalty that accrues month-to-month on the quantity you owe, as much as 25% of your invoice. So in case you owe $5,000, you’ll have an extra $250 added to your invoice every month till you file or hit that 25% most. That’s on high of curiosity charged by the IRS on any excellent tax funds. For the primary quarter of 2026, the curiosity is 7% per yr, however that may fluctuate over time primarily based on market charges.

The failure-to-file penalty is way increased than the failure-to-pay penalty, which is simply 0.5% of your unpaid taxes for every month (or partial month) till you pay. Within the $5,000 state of affairs, that provides simply $25 per 30 days to your invoice, which is rather more digestible. 

For those who want extra time to file your tax return, contemplate submitting an extension to keep away from the 5% penalty. You’ll nonetheless have to pay your owed quantity by April 15 to keep away from the failure-to-pay penalty, however that buys you time whereas avoiding the bigger payment. 

Rule #2: Discover IRS cost choices

For those who can’t afford to pay your tax invoice on time, contemplate making use of for a cost plan from the IRS. Additionally known as an installment settlement, it provides you a set timeline for paying your tax invoice. The most important profit is that it reduces the failure to pay penalty from 0.5% to only 0.25%. Nevertheless, each day curiosity nonetheless accrues in your steadiness till it’s absolutely paid.

You possibly can apply for one among two varieties of IRS installment agreements:

• Brief-term: Invoice have to be paid in 180 days or much less; no setup payment required
• Lengthy-term: Month-to-month cost plan; setup charges apply relying on the way you apply

A brief-term cost plan is good in case you simply want just a few months to give you the money, whereas an extended plan permits you to pay in common intervals for so long as 10 years. 

Rule #3: Examine penalty reduction eligibility

In some situations, you could possibly request penalty reduction to assist decrease your IRS invoice. There are three varieties chances are you’ll qualify for:

• First time penalty abate and administrative waiver: You might qualify in case you haven’t had any penalties within the earlier three years.
• Cheap trigger: Eligibility is determined by your means to show you had cheap trigger for failing to file your tax return. You additionally should exhibit vital mitigating elements, like a superb compliance historical past or financial hardship.
• Statutory exception: Instance qualifying conditions embrace getting incorrect written recommendation from the IRS or residing in a federal catastrophe space.  

Rule #4: Contemplate paying with a bank card or private mortgage

One other choice to pay your owed taxes is to make use of a bank card¹ or private mortgage*, particularly in case you don’t wish to empty your financial savings to repay your debt to the IRS. The profit with this feature is that you could rapidly deal with your IRS debt and owe a lender relatively than the federal authorities. 

A 0% introductory APR bank card may aid you save on curiosity. Simply be practical about whether or not or not you’ll be able to actually repay your steadiness throughout the introductory interval, in any other case you might accrue much more costly curiosity costs. Additionally be aware that the IRS costs an extra 1.75% for funds made with a bank card.

A private mortgage provides you mounted funds over a particular time frame, offering you with a transparent debt payoff technique and timeline. Rates of interest are normally decrease in comparison with a bank card. Relying on your credit score rating, chances are you’ll even qualify for a comparable APR to the IRS charge, particularly when factoring within the failure to pay penalty and bank card charges. 

Rule #5: Future-proof subsequent yr’s taxes

After you have a plan for this yr’s excellent IRS debt, begin growing sturdy monetary habits to keep away from owing subsequent yr. It’s useful to seek out out what contributed to your owed taxes this yr. Did your revenue soar? Did you earn more money from a facet hustle? Did you might have a big capital positive aspects invoice or change your submitting standing?

If it’s a everlasting change and also you’re an worker, alter your withholdings by submitting a brand new W-4 kind to your office. For those who’re self-employed or have a facet hustle, ensure you pay quarterly estimated taxes. 

You possibly can keep away from an underpayment penalty in case you both owe lower than $1,000 or pay the smaller of those two numbers: 

• 90% of your present yr’s tax invoice
• 100% of final yr’s tax

Flip tax debt into a greater monetary plan

Getting a shock tax invoice could be scary, however it doesn’t need to utterly derail your funds. Create a plan to repay your owed taxes as quickly as doable and verify for alternatives to get a few of these penalties waived. Additionally keep in mind that a private mortgage can provide the flexibility to decide on a compensation timeline that works for you whereas additionally relieving the stress of owing cash to the IRS.

* All private loans made by WebBank.

¹The Prosper® Card is an unsecured bank card issued by Coastal Group Financial institution, Member FDIC, pursuant to license by Mastercard® Worldwide.