If you’re expecting a tax bill this year and you can’t afford it, the worst thing you can do is ignore it. The IRS charges a failure to pay penalty of 0.05% per month on the outstanding balance until it’s paid off, and while they charge you interest compounded daily. But the real victim in all this isn’t your checking account, it’s your credit report.
Why do I owe?
I’ve written before about how the new tax law affected withholding. Basically, the Tax Cuts and Jobs Act changed withholding amounts and for most people, too little was withheld. If you’re a W2 employee, you should check with your employer to see if you should change your filing status for next year. Remember: Bigger paychecks equal lower refunds for most people.
The Truth About Extensions
Some people think if they file an extension they don’t have to pay anything. Wrong! An extension doesn’t mean the due date is extended. It means you still have to pay, but the due date for filing the documents is extended. In some cases the penalty may be waived, but never the interest.
You can negotiate with the IRS and pay in installments — but you can never miss an installment due date because that could result in a tax levy or a lien. With an installment plan, the interest rates drop as long as you abide by the agreement that you made with the IRS. You can stretch your payment plan out for five years if you need to. Depending on how much you owe, you could pay them as little as $25 a month.
If you owe the IRS over $10,000, they could put a lien and a levy on your home. I’ve seen people get their salaries garnished, or the money in their checking and savings accounts seized. The IRS is very “big brotherish” and can find our assets around the world with ease.
If you don’t file at all, the IRS will file for you. They have copies of your W2s, your 1099s and other items that are required by law for companies to report to them. However, this convenience comes at a price. They don’t take into consideration the deductions to which you are entitled. Your liabilities end up being higher, and you end up paying more than you would have had to. If you’re unsure of your filing status for a given year, get your tax transcript from the IRS here. NOTE: Never pay for a tax transcript!
Whatever your situation, ignoring your tax bill is like driving blindfolded. When you finally crash, you might see your wages garnished and your bank account seized — and when the IRS seizes your bank account, they take whatever you owe, even if it brings your balance to zero.
In an ideal world, it would be impossible to ignore your tax bill because you wouldn’t even have a tax bill. There are steps you can take during the year to come closer to this ideal. I would start by talking to someone in human resources and follow it up with a call to your trusted accountant — but don’t wait until April 14!