- The IRS may penalize you up to 25% of your outstanding tax bill if you don't pay on time.
- Working with the IRS to come up with a plan is easier than you might think.
The best move? Deal with a tax bill as soon as possible.
We are within days of the dreaded deadline to file taxes. That's right -- by April 18, we're expected to have the mess of documents like income statements, daycare bills, and receipts for expenses organized enough to let the government know how much we earned in 2021. Then, it's the government's turn to let us know whether we paid too much and are due a refund, or if we're stuck with a tax bill.
First, we'll talk about what happens if we simply decide not to file this year. As tempting as it may be to pretend we don't owe taxes, the U.S. government does not look on it kindly when we fail to pay -- even for one year. Underpaying can also happen to anyone, and should be immediately addressed.
What happens if we don't pay
Suppose 2021 was an outstanding year income-wise (we're pretending here), and you learn that you owe $5,000 to the federal government. According to the good people at the IRS, the Failure to Pay Penalty is 0.5% of the unpaid amount -- each month you fail to pay.
The first month you fail to pay, the IRS tacks $250 onto the bill ($5,000 x 0.5% = $250), and they do the same thing each month or part of a month you don't pay. The silver lining is that the penalty won't exceed 25% of your unpaid taxes. In this scenario, that would be $1,250 ($5,000 x 25% = $1,250).
It doesn't have to be that way
If you finish taxes only to realize that you owe money, there is a way to handle the situation if you can't pay right away: You can file for an installment plan.
Sticking with the scenario, say you owe $5,000. Any balance under $10,000 is usually automatically approved for an installment agreement. As long as you promise to pay it off within three years, you simply let the IRS know how much you can pay each month.
Lower-income taxpayers aren't hit with a set-up fee, but let's say you're not lower-income, and must pay a fee to set up the installment agreement. Here's how much you can expect to pay:
|How you pay||Method used to set up the agreement||One-time fee|
|Direct debit||Phone, mail, or in-person||$107|
|By check or some other method||Online||$149|
|By check or some other method||Phone, mail, or in-person||$225|
As you can see, allowing the IRS to automatically take the agreed-upon payment from your bank account each month is the least expensive way to set up an installment agreement.
Note: If you can pay off the tax bill in 120 days or less, it's free to set up an agreement.
There's no shame in owing taxes -- after all, it's relatively easy to overpay or underpay taxes. Don't postpone dealing with the situation if you owe taxes this year. It may not be painless, but the sooner you take care of it, the sooner you can move on to more important matters.
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