You can feel the pressure. The tax deadline is looming and you know you owe the IRS money. Problem is, you owe more than you have sitting in your checking account.
Believe it or not, there are options open to you.
The best course of action is to find the funds to pay the IRS what you owe by the deadline. Let’s look at a few ways to get the IRS paid:
Take the Money out of Savings
The meager return on most bank savings accounts is probably no match for the penalties and interest the IRS will add to your tax debt. It makes sense to pay the IRS what you owe now and then work on building back up your savings later.
Personal Loan from a Friend or Family Member
If you have no savings, another route is to ask a friend or family member for a loan. The interest rate you agree to will likely to be lower than the penalties and interest you’ll receive by not paying the IRS on time.
Use Your Credit Card
The IRS takes credit cards. If you have enough room on your card to cover what you owe the IRS, this may be the way to go.
Of course, you will have to pay interest on the balance to your cardholder. You’ll also have to spring for the credit card discount (normally merchants pay this… the IRS won’t).
The additional you’ll pay by using your credit card may still be less than the penalties and interest the IRS will stack on top of your debt to them.
Ask for an Installment Agreement
Don’t have savings, a friend or family member who’ll float you or a credit card that can accommodate what you owe?
There is still a way out of this pickle. It’s called an Installment Agreement.
This is an agreement between you and the IRS to pay your debt over time.
The streamlined option (read: easier) is available if you owe $50,000 or less. You can make monthly payments over time for up to six years.
The reason this is not as attractive as finding the funds to pay the IRS on time is that you’ll still be subject to a penalty. However, that penalty will be cut in half.
To keep your agreement, you must make all of your payments on time. You must also stay current for future tax years. If you do not, you will be deemed to be in default… which is not a good place to be. The IRS can then start enforcement actions to collect everything that you owe.
If you owe more than $50,000, you will either need to have your financial situation validated by the IRS.
Or, you can pay down your IRS tax debt to $50,000 and request an installment agreement on the balance.
Your 401K… A Last Resort
When you’re facing an urgent financial need, it can be tempting to dip into those retirement accounts.
The noblest reason not to do so is the fact that you’ll need those funds later. Not everyone is able or willing to work until the official retirement age.
There’s another, more immediate reason you should keep your hands off. Taking distributions from retirement funds can actually INCREASE your tax bill! This is the exact opposite of what we are trying to achieve.
Unless you have a Roth IRA or other after-tax retirement savings, withdrawals are taxable (typically at the highest rate). They can also be subject to a 10% early withdrawal penalty.
The Final Word
You need to carefully weigh the cost versus the benefit of each option before proceeding.
Whatever you do, don’t stick your head in the sand. The debt will not go away… it will increase and things could get ugly!
At SFS Tax, we’ve been helping people navigate the IRS and taxes for over 35 years. Call our office at (772) 337-1040 for an appointment or make an appointment online. We’ll be glad to help you find a way out.