Tax Day is a little over one week away, and by now, you’ve hopefully finished your taxes or are almost done filing. But what if you started your taxes thinking a refund was waiting for you, only to find you actually owe taxes?
Perhaps you got a promotion with a salary increase last year, putting you in a higher tax bracket; if you didn’t have enough taxes withheld, you could owe Uncle Sam.
But don’t worry. If you discover you owe this year, here’s a helpful game plan.
[See: 9 Red Flags That Could Trigger a Tax Audit.]
Don’t Delay: File
While people who are due refunds may rush to file early, those who know they will owe may put it off. Don’t. This can be even more costly. The IRS will penalize you if you fail to file, fail to pay or both by the tax deadline. Even if you can’t pay the tax but file on time, at least you’ll avoid additional penalty. The No. 1 rule: File your taxes by the deadline.
If you don’t file your taxes by the tax deadline, the failure-to-file penalty is 5 percent of the tax owed per month that the money is late, capped at 25 percent. To put this into perspective, if you owe $3,000 on your tax bill and you don’t pay it for five months, you will owe an additional $750 on top of the $3,000 — just for failure to file.
[See: A Checklist for Last-Minute Tax Filing.]
Don’t Delay: Pay
Not only are you at a disadvantage if you don’t file on time, but paying after the deadline can have the same effect. Failure to pay will result in a penalty of half of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid.
This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.
Filing an Extension Might Help
If you absolutely cannot file by April 18, you can request a six-month extension to file by October. According to the IRS, you must complete Form 4868 to request an extension and either submit it via mail or file an Easy Extension by April 18. Each state has its own requirements, so check your state tax authority’s website for more information.
It’s important to know that an extension to file is not an extension to pay, so you’re still required to pay by the April 18 deadline this year. You may also owe interest if the tax you owe isn’t paid by the original due date of your return.
Just remember that an extension is not the be-all-end-all answer if you owe money. While it will help you avoid failure-to-file penalties, owing money is not a reason to file an extension, and may not be the best solution. If you have all of your documents ready, there’s no reason to file an extension.
[See: 8 Hacks to Ease Your Financial Life.]
If You Are Late, Tell the IRS Why
If you experienced an emergency and have a valid excuse for why you were unable to file or pay by the deadline, you may not have to face a penalty. If you can show reasonable cause, do not neglect to report it to the IRS.
Pay What You Can
If you don’t have all the money you need to pay your taxes, but you can go ahead and pay some, that’s the best thing you can do. Your penalties and interest are based on the amount you do not pay, so the smaller you can make the shortfall, the less you will pay in the long run. If you owe $1,000 but you only have $750 budgeted for your taxes, paying $750 by deadline will reduce the financial burden you carry in interest and penalties.
Request an Installment Agreement
If you don’t have the money to pay your taxes immediately, you can request an installment agreement, which allows you to pay your tax debt over six years.
You may be eligible to apply for an online agreement. According to the IRS, individuals who have filed all required forms and owe $50,000 or less in combined individual income tax, penalties and interest can apply for the online installment agreement.
Short-term Payment Plans Are Available
If you don’t think you’ll need much time to pay your tax debt, you can also request a short-term payment plan up to 120 days.
How to Pay the IRS
The fastest way to make a payment is online through IRS Direct Pay, a secure service that allows you to pay straight from your checking or savings. You can also send your money through an Electronic Funds Withdrawal, which can be done during e-file. Other options are a same-day wire (bank fees may apply), check or money order payable to the U.S. Treasury, or cash to a participating retail store.
Don’t be worried if you’ve suddenly found you owe this year. You have options available to help you pay your tax liability. Filing extensions, initiating installment plans and putting the money forward that you do have can all be very helpful in lowering your financial burden.
Going forward, adjusting your withholding or maximizing your retirement might help ensure you don’t owe next year.
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What You Need to Know If You Owe the IRS originally appeared on usnews.com
