For the majority of Americans who can anticipate a refund during tax season, the painstaking process of compiling W-2s and calculating deductions is rewarded with a windfall of cash. But for the millions of taxpayers who owe money to the IRS, tax filing season can be a time of unexpected financial stress, according to a new survey by U.S. News.
The survey, which ran in March 2023, received responses from 1,208 Americans who owe money to the IRS for the 2022 tax year. We asked respondents a series of questions to determine how they are impacted by their tax debt and how they plan to repay it. Here’s what we found:
— Tax bills are an unwelcome surprise for many Americans. Nearly half of respondents (45%) were surprised that they owed money to the IRS this tax season, and 61% of them say they usually get a refund when they file. Additionally, 28% don’t know why they owe taxes this year.
— Consumers generally feel burdened by their tax debt. Three-quarters report being at least a little stressed about their tax bill, with more than a fifth (21%) being “extremely” stressed. More than a quarter (29%) say they won’t be able to pay their debt by the April 18 deadline.
— Most taxpayers who owe money to the IRS are somewhat distrustful of the U.S. tax system. Less than half of respondents (49%) believe they’re being taxed fairly relative to their income, and just 32% think their tax dollars are being used wisely by the federal government. What’s more, 45% report being targeted by tax relief scams such as suspicious phone calls or unsolicited emails.
— Of concern, 11% of respondents will need to borrow money in order to pay their tax bill. Among them, they plan to charge a credit card (41%), borrow money from friends or family (23%), or take out a personal loan (21%). Still, the majority plan to pay their tax debt using cash/savings (63%) or by enrolling in an IRS payment plan (26%).
— About half of those with tax debt (48%) say they’ve had to change their financial habits to pay it. Of them, 50% have had to cut down on spending, while others are falling behind on their savings goals (17%), delaying a major purchase (16%) or postponing a vacation (15%).
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Many Taxpayers Aren’t Prepared to Pay Surprise Tax Bills
Taxpayers who owe money to the IRS aren’t always expecting to receive a tax bill — in some cases, they don’t even know why they owe taxes. Forty-five percent of respondents were surprised they owed money this tax season, and more than a quarter (28%) say they don’t even know why they ended up with a tax bill instead of a refund.
Considering how many consumers weren’t prepared to owe taxes, it makes sense that some didn’t have a plan in place for repaying their debt. While the majority of respondents (63%) plan on paying their tax bill using cash or savings, about a quarter will need to enroll in an IRS installment agreement to pay their debt over time. All told, 29% say they won’t be able to pay their taxes by the April 18 deadline.
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In a worrying result, some Americans plan to go further into debt to repay their taxes. About one in 10 respondents (11%) plans to borrow money to pay the tax bill. Among them, 41% will charge a credit card, 23% will borrow from friends or family, and 21% will take out a personal loan. A small percentage plan to borrow money from their retirement account (10%) or tap their home equity (5%) to pay their taxes.
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Tax Debt Is a Stressful Burden on Those Who Owe
Just over a quarter of taxpayers who owe money to the IRS aren’t at all stressed by their tax bill, and the vast majority (74%) experience at least some level of stress over repaying their debt. About one in five (21%) reports feeling “extremely” stressed about paying the tax bill.
With fairly widespread anxiety surrounding tax season, it may not come as a surprise that respondents have a somewhat negative view of the American tax system. A little over half of respondents (51%) don’t think they’re being taxed fairly relative to their income. When asked if they believe their tax dollars are being used wisely by the federal government, the majority (68%) say no.
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For those who owe tax debt, nearly half (48%) have had to change their financial plans or adjust their spending habits in order to pay their taxes. Among them, the most common response is that they have to cut down on spending (50%) as a result of their tax bill.
Additionally, 17% are unable to meet savings goals, such as contributing toward their retirement nest egg or emergency fund. Nearly as many (16%) have had to postpone a major purchase, such as buying a car or home, and 15% have had to postpone a vacation or leisure trip.
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When asked to specify another reason for changed plans, a few respondents gave additional insight: They can’t pay their bills, they can’t afford their medications and they have to cut spending on groceries, clothing and essentials. Additionally, one respondent “reverted money from paying down debt to save for taxes.”
Looking forward, two-thirds (66%) plan to change their financial strategy this year to reduce next year’s tax bill. Just 56% say they had been withholding a portion of their income last year in anticipation of tax season.
[Read: 10 Debt Relief and Payoff Options.]
What to Do If You Can’t Afford Your Tax Bill
While taxpayers who can’t afford to repay their tax debt may experience financial stress, there are avenues for assistance that don’t involve going further into debt. Here are a few IRS programs that can make it easier to repay a tax bill debt over a longer period of time:
— File for a short-term extension. If you just need a few more months beyond the April 18 deadline to pay your taxes, you can file a 120-day extension online using IRS Free File. It’s free to apply, but you’ll be charged interest at the federal funds rate plus 3% (the current rate is 7%), as well as a late-payment penalty of 0.5% of the balance you owe per month until the debt is repaid.
— Enroll in an IRS installment agreement. If you can’t repay your tax debt within four months of the tax-filing deadline, you can enroll in a longer-term payment plan on the IRS website. This allows you to break up your tax debt into fixed payments for up to 72 months at the current 7% rate, and the late-payment penalty is reduced to 0.25% per month. There’s an upfront application fee of up to $130, but that fee may be lowered if you enroll in automatic payments or if you meet certain income requirements.
— Apply for economic hardship programs. If you can’t afford your tax bill due to sustained financial hardship, you may qualify for an additional extension or you may be able to settle your tax debt for less than you owe with an offer in compromise, or OIC. Keep in mind that the IRS accepts less than a third of OIC applications, but you can see if you’re a good candidate through this IRS questionnaire.
More from U.S. News
Should You Use a Personal Loan to Pay Your Tax Bill?
How to Mentally — and Financially — Prepare for a Disappointing Tax Refund
Surprise: There’s Another Tax Deadline on April 18
1 in 5 Americans With Tax Debt Is ‘Extremely’ Stressed About It originally appeared on usnews.com
