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Is Owing the IRS Money a Bad Thing? Not Necessarily.

By Maurie Backman – Feb 16, 2020 at 2:18PM

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Tax refunds really aren't as wonderful as you might think they are.

Most people who file a tax return wind up with a refund from the IRS. That refund can be modest, or it can be sizable. But what if you land in the opposite boat and wind up owing the IRS money? It may seem like a horrible position to be in, but in reality, it's not such a bad thing at all.

Is it better to owe than to receive?

When you get a refund in conjunction with filing your tax return, it means you overpaid your taxes the previous year and gave the government an interest-free loan for absolutely nothing in return. When you owe money, it means you got an interest-free loan and are simply returning the sum you were never entitled to keep in the first place.

Now, which actually sounds worse?

We're wired to believe that tax refunds are a windfall, but the money you get back from the IRS is by no means free money. Rather, it's money you earned and were entitled to, but waited months to collect.

Woman at laptop, holding her head

IMAGE SOURCE: GETTY IMAGES.

Now, let's imagine you're due a $2,400 refund this year. That means you were shorted on $200 of earnings per month throughout 2019. What if, during that time, you were forced to rack up a modest amount of credit card debt in the absence of having enough money to cover all of your expenses? Had you received that $200 a month up front, perhaps that wouldn't have happened.

Before you get too upset about owing the IRS some money, think about the financial flexibility that extra cash may have given you during the year. Maybe it spared you from costly credit card debt, or gave you the option to cover other bills without stress.

One thing all filers should keep in mind this year is that owing the IRS money is really only a bad thing if you can't pay your tax bill. If you don't have the cash on hand to pay what you owe by the April 15 filing deadline, you'll incur interest and penalties on your unpaid taxes, which clearly isn't good. But if you have the money to pay the IRS, then there's no sense in getting too upset about it.

Remember, it's really difficult to 100% break even on your taxes during the year because the amount you ultimately owe the IRS hinges on multiple factors -- your salary, your tax-filing status, your side income, your bank account interest, and your investment earnings -- just to name a few. Therefore, filers generally either are owed money by the IRS during tax season, or need to write out a check themselves.

Perhaps in an ideal world, there would be a way to better calculate taxes so that we could all pay the IRS the exact amount it's entitled to month to month, thereby avoiding refunds and underpayments alike. But in the absence of that, you may be better off owing some money in April than getting a lump sum in refund form.

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