How you should handle large tax bills
No one likes to hear they have a large tax bill due at the end of the year. As an accountant, I do not look forward to communicating large tax bills to a client. However, once your tax return is prepared, completed and filed with a payment due, you have several options available for consideration.
The first option is to pay the full amount due in a single payment. Be sure to send your payment with a payment voucher (Form 1040-V) to ensure it is properly credited to you. While taxes are actually typically due by December 31, you won’t have much problem from the IRS if you owe less than $1,000 and pay by April 15. The IRS has extended Lee County’s due date to July 31 because of the President’s disaster declaration.
However, taxpayers may often find themselves in a difficult situation in the event they owe significantly more than expected or are able to pay in a single payment. This may occur because of self-employment taxes (often the result of successfully operating a side job or moving from a W2 job to being an independent contractor), significant increases in compensation, a hefty capital gain, or failing to withhold and remit sufficient taxes when you withdraw funds from a retirement account and cannot avoid the 10% early withdrawal penalty. Whatever the case may be, the most important thing to do in these situations is not to panic!
Do not avoid filing your tax return in this situation – the IRS is much more lenient to taxpayers who file their taxes but don’t pay them immediately (0.5% late payment penalty for each month, plus 6% interest) as opposed to those who do not file their taxes at all (5% failure-to-file penalty for each month past the due date you don’t file, plus the late payment penalties and interest). The maximum penalty on your taxes can be quite substantial at 47.5%!
So, go ahead and file your tax return timely, and then deal with how to pay.
Several methods of dealing with large tax bills are available. First, pay as much as you can by the due date. If you can and do pay off your tax bill within a few months, you will likely not hear from the IRS beyond a regular payment due letter with some penalties and interest tacked on.
If you need a longer period of time (more than 120 days), the IRS will generally let you set up an installment agreement through automatic withdrawals or via a credit card. It’s best not to use a credit card though – the interest you pay on most credit cards vastly exceeds the interest charged by the government. The IRS is typically very willing to work with you to pay off your tax bill, and you’ll find the best results occur if you stay in communication with them and regularly pay on your tax bill.
Lastly, you may be able to establish an offer in compromise, in which you settle with the government for a fraction of what you owe. This is a combined legal and accounting matter, and should typically only be used after you have exhausted other options.
Visit www.irs.gov/payments for more information and resources on how to pay.