Tax debt may be distressing, especially if you are unable to pay on time. In most circumstances, you will face interest or fines rather than prison time for tax evasion. Even if you are unable to pay back your taxes, you must file your return or request an extension of six months. Then, consider your alternatives for paying the IRS the amount you owe. We will discuss the repercussions of failing to file or pay on time, and also what you might have to do if you owe the IRS money. Learn more about Back Tax Help
What happens when you fail to pay the IRS?
You may be wondering if you need to submit a return if you can’t pay your tax obligation. However, this is perhaps the most crucial point. To avoid paying the failure to file a penalty, you must submit your return or request an extension of time. This penalty is 5% of the outstanding sum every month or portion of the month and can reach a maximum amount of 25% of the unpaid tax. The minimum penalty for returns submitted more than sixty days after the original date or the delayed due date is 100% of the tax that remains unpaid.
What Should You Do If You Owe the IRS?
- Request a brief grace period to pay the entire sum: The IRS will give people a maximum of 120 days to pay their whole tax bill. There is no fee for requesting an extension. This option is useful for taxpayers who require a short period to pay their whole tax due. The IRS will collect interest at the federal short-term rate plus 3%. You can save the monthly installment application cost but not the late-payment charges and interest with short-term renewals.
- Setup a payment schedule with the IRS: Installment agreements are IRS payment schedules that taxpayers can set up. The sort of arrangement you may obtain is determined by your circumstances, including the amount you owe along with how quickly you can pay the remaining amount. If you can repay the debt in 120 days, you should not enter into an installment arrangement. If you get into an installment plan, the interest rate on your outstanding debt is reduced to 0.25% each month until the whole balance is paid on time. You may also hire an expert to assess your problem and provide the best solution.
- Borrow money from your 401(k) plan: If your 401(k) plan permits this sort of borrowing, you are normally limited to 50% of the loan amount and the money must be repaid within five years. The plan needs to incorporate interest charges. If permitted, borrowing from your 401(k) plan may serve as a quick and affordable source of income to pay current or prior taxes. Taking out a loan, on the other hand, may have a negative influence on your future retirement funds if you do not repay it.