Do you owe the IRS and have no idea how you are going to pay your taxes? First of all, take a deep breath. Each year, millions of Americans find themselves facing a tax bill instead of a tax refund. Next, be sure you file your tax return even if you can’t pay your taxes. Why? The failure-to-file penalty is much steeper than the failure-to-pay penalty. There’s no reason to stack more debt on your tax bill if you can avoid it. And finally, review these 10 ways to pay your taxes and decide which option is best for you.
IRS Options to Pay Your Taxes
The IRS offers several tax relief programs to help taxpayers pay off their tax debt. Depending on your specific situation, you may qualify for one or more of these options.
Short-Term IRS Payment Plan
Are you in a position to pay off your tax debt, but just need a little more time to get the funds together? A short-term payment plan (also known as an installment agreement) will give you an additional 120 days to pay off your bill. To qualify, you must owe less than $100,000 in combined tax, penalties, and interest. Although there is no setup fee, your account will continue to accrue interest and penalties until the debt is paid in full.
Long-Term IRS Payment Plan
For those who may need a bit more time, the IRS offers long-term payment plans, as well. Under this installment agreement, you’ll have up to 72 months to pay off your tax debt. To qualify, you’ll need to owe less than $50,000 in combined tax, penalties, and interest, You must also be up to date on all tax return filings.
The setup fee varies, depending on whether you pay through automatic withdrawal ($31 online fee) or another form of payment ($149 online fee). Setup fees are also higher if you apply by phone, mail, or in-person ($107 direct debit and $225 other forms of payment). If you’re low-income, however, you may qualify for a setup fee waiver. Regardless of your repayment selection, your account will continue to accrue penalties and interest until your taxes are paid in full.
Partial Payment Installment Agreement
Under a partial payment installment agreement (PPIA), you’ll be able to pay your taxes over time. The big difference, however, is that you won’t have to pay the full amount owed. At the end of the agreement, any remaining tax balance is forgiven. Before the IRS will agree to a PPIA, all of your tax returns must be filed. You must also be current on any income tax withholding or estimated tax payments. If you owe back taxes from a previous return, you’ll need to pay those off, as well.
The IRS will file a tax lien against you for the amount owed, just in case you default on the agreement. They may also re-evaluate your financial situation and adjust your monthly payment amount every two years.
To qualify, you must owe at least $10,000 in taxes, including interest and penalties. If you have filed for bankruptcy or had an Offer in Compromise accepted previously, however, you are ineligible for a PPIA.
Offer in Compromise
If a payment plan isn’t an option, an Offer in Compromise (OIC) could be the solution. An OIC allows you to settle your tax debt for less than you owe, but there’s no guarantee the IRS will accept your offer. In general, the IRS will consider the following when reviewing your OIC request:
- Your ability to pay
- Asset equity
They will also expect you to pay your tax debt within a reasonable amount of time, either by lump sum or periodic payments. If you have unfiled taxes, are currently in bankruptcy, or are behind on your estimated tax payments, you are ineligible to apply.
The OIC process is fairly complicated and most offers are rejected by the IRS. We strongly suggest working with an experienced tax professional if you decide to pursue this option.
Other Ways to Pay Your Taxes
If you owe less than $10,000 or do not qualify for any of the above IRS tax relief programs, you still have various other ways to pay your taxes.
Cash Out PTO
Do you have any unused vacation days or excess paid time off (PTO)? Consider asking your employer if you can exchange that time off for actual cash. Keep in mind that any funds received for a PTO payout will be taxed similarly to your regular pay, but it could help you avoid additional penalties and interest on any unpaid taxes.
Sell Your Assets
One way to reduce or eliminate your tax debt is to sell off some of your assets. This may include jewelry, vehicles, home furnishings, artwork, stocks, bonds, or anything else of value. If it’s something sentimental, you might consider asking a friend or a relative to loan you the money in exchange for the item as collateral. This way, when you’re in a better financial situation, you can buy the item back.
Take Out a Loan
Another way to pay your taxes is by taking out a personal loan. We suggest starting with your bank, as they may offer better interest rates. Other options include SoFi, Upstart, and LendingClub, just to name a few. Just be sure to do your homework to get the best rates and to make sure you can comfortably afford the monthly payments. If you fall behind on payments, you’ll still owe the money and also be damaging your credit score.
Apply for a HELOC
Do you have substantial equity in your home? You may want to consider taking out a home equity line of credit (HELOC) to cover your tax debt. HELOC rates are generally lower than personal loans and may even be lower than the interest charged to your outstanding taxes. Again, make sure you can afford the monthly payments or your home could be at risk.
Use a Low-Interest Credit Card
We generally would caution against using a credit card to pay off your taxes, but it may make sense if the amount is manageable and you can pay it off quickly. The IRS accepts all major credit cards for online payments. Please note that there’s a limit to how many credit card payments you can make and you will be assessed processing fees.
Borrow From Your 401k
Taking out money or a loan against your 401k should only be considered as a last resort. Generally, you will be limited on the amount you can borrow. You will also face a 10% early withdrawal penalty, if you’re under the age of 59. You will also pay income tax on the amount withdrawn. The penalty does not apply if you take out a loan, but you may be restricted from contributing for some time. Be sure to consult with your 401k provider to understand all the potential implications of using your 401k funds to pay your taxes before withdrawing any money or applying for a loan.
Seek Help From a Tax Professional
There are a variety of ways you can choose to pay your taxes. Some are better than others, but all are better than not paying anything at all. Ignoring your tax debt can lead to unpleasant consequences, such as wage garnishment, levies, and liens. If you owe the IRS and need help figuring out the best way to pay your taxes, contact Tax Defense Network. We can help you find the best solution for your tax problem. Call 855-476-6920 today for a free consultation and explore your tax relief options.