7 Steps of Paying Back Taxes
According to the 2018 Taxpayer Attitude Survey (TAS), 95% of American taxpayers believe it is their civic duty to pay tax. Yet, many such hardworking and patriotic taxpayers often find themselves at odds with the IRS and wind up paying back taxes.
A bad break or a layoff are just some of the unfortunate circumstances why you might not be in a position to settle your tax debt. Fortunately, in most cases, the taxman is willing to negotiate a favorable term to help you to offset your balance. Most people would agree seeking tax resolution services goes a long way.
Read on to discover ways of paying back taxes with ease.
What are the Ways of Paying Back Taxes
Taxpayers who owe the IRS money can negotiate for favorable IRS payment plans if they are unable to pay the back taxes in full.
These payment methods include:
1. IRS Direct Pay
If you realize you owe the IRS back taxes and you’ve enough in your bank account to offset the balance you can use direct pay. This payment feature allows paying your estimated taxes and other Form 1040 series directly from your bank account at no extra cost.
The service is available from Monday to Saturday and for half a day on Sunday. Each payment cannot exceed $10 million and you cannot make two payments within 24 hours.
2. Apply for a Payment Plan
The IRS allows defaulters to settle the tax debt, penalties, and interests by making small payments over some time.
You can apply online for a payment plan. On completion, you will be notified whether it has been approved. This service is available for both businesses and individuals.
You qualify for a long-term installment agreement if you owe the IRS $50,000 or less, which includes interest and penalties. While a short-term payment plan is for those who owe less than $100,000. A short-term agreement is to be paid in 120 days or less.
Although it allows you to make smaller payments, it’s still expensive in the long run. Interest is charged on the outstanding tax balance.
3. Request for an Extension
You might not have the outstanding tax debt but you might be expecting to have the amount at a future date. In such situations, an extension is the best way out.
Typically, April 15 is the tax deadline, but if you file for an extension you are granted an automatic six-month extension. You will have until October 15 to file. Requesting for an extension is done by downloading and completing Form 4868.
The extension is only for the current year’s tax returns. Any amount you previously owe will continue to accrue interest and relevant penalties still apply. It is advisable to pay the previous amount owed when you file the extension.
Be sure to send the extension by a certified mail and request a return receipt as proof. The extension must be filed on or before April 15.
4. Apply for Hardship/ Tax Relief
Taxpayers who are facing financial hardship can apply for tax relief. This temporarily exempts you from paying back taxes until the situation is resolved.
The common tax relief options available are:
- Currently Not Collectible: It’s a reliefgranted when you cannot pay your tax debt and you’re struggling to meet basics needs i.e. food, shelter, utility bills, and clothing. This status can be revoked once you deemed able to meet your tax obligations.
- Penalty Abatement:A tax relief granted by the federal government that waives some of the penalties to facilitate faster repayment of tax debt. First-time penalty abatement is only offered for failure to file, failure to pay, and failure to deposit penalties.
- Offer in Compromise (OIC): An agreement allowing the taxpayer to settle their tax debt at less than the full amount owed. This relief is only available to those who don’t qualify for other payment methods like installment agreements.
5. Get a Personal Loan
Personal loans from family and friends are an inexpensive way to settle your tax debt, depending on the interest charged.
Alternatively, you can turn to a bank or any other lending institution for a personal loan. Be sure to do your research before you commit.
Some lenders have restrictions on what you can do with the loan. Ensure your lender will allow you to use the loan to settle your tax bill. Other factors to consider include annual payments, collateral, and type of interest rate.
6. Borrow from Your 401(K)
You can also borrow from your 401(K) if your plan allows for such loans. It can be a smart move since this kind of loan does not lower your credit score.
The downside to a 401K loan is it can negatively affect your retirement savings if you fail to pay in time. 401(K) loans are limited to 50% of the amount saved or a maximum of $50,000.
The other risk is if for any reason you leave your employer before the loan is repaid, you will have to settle the difference on your own within 60 days.
7. Pay Using Debit and Credit Cards
The IRS accepts standard payments from commercial card networks to process payment.
The advantage of using this feature is it allows you to make payments over the internet for both taxpayers who e-filed, paper-filed or in response to a notice.
The service fees vary depending on your payment processor.
- PayUSAtax charges a flat fee of $2.55 if you pay by debit cards. For credit card a fee of $2.69 alongside an interest of 1.96%.
- Pay1040 charges a fee of $2.58 for debit card payment, $2.59 for credit card payments at an interest of 1.87%.
- OfficialPayments charge between $2.00-$3.95 for debit cards and $ 2.50 and an interest of 1.99% for credit cards.
Payment is accepted for all major card networks. However, these are not recommended especially if you have unmanageable credit card debt.
Get Professional Help
Paying tax debt is a complex and lengthy process. Changes in the tax laws are made every year and can often be confusing. It’s easy to make an error if you try to figure things out on your own.
True Resolve Tax can help you with the process of paying back taxes. Our team of IRS Enrolled Agents has a ton of experience in all matters of taxes. Call us today and let’s get you back on the path of financial freedom.