Discovering that you owe the IRS money is never a good feeling.
Surprise tax bills can happen for all sorts of reasons.
Gig work and side hustles can fatten your liability.
Some people are surprised to learn after being laid off that evenunemployment benefits are taxable.
Whatever the reason, you have options.
But its essential that you take action.
Here are four mistakes to avoid and what to do instead.
Mistake #1:You dont file a tax return because you cant pay your bill.
The smart strategy:File a return, even if you cant afford to pay.
The penalties for notfiling a tax returnare much tougher than the penalties for not paying on time.
Heres how it works:
Note thatfiling for a tax extensiononly gives you more time to file.
It doesnt give you more time to pay taxes if you owe.
No Interest Til Almost 2027?
If that happens, youll still want to file your own return.
The substitute return wont includetax deductionsandtax creditsthat could potentially lower your bill.
Mistake #2:You use a credit card or cash advance to pay your taxes.
The smart strategy:Apply for an IRS payment plan.
This ones a head-scratcher because even theIRS suggests paying taxesyou cant afford with a credit card or cash advance.
Apparently, the IRS doesnt realize its own generosity as a creditor.
A much better option is to apply for an IRS installment plan.
Youll still accrue penalties and interest.
With interest, that works out to 6% annually.
Cash advance APRs are even higher, plus they often come with additional fees.
Youll pay a $31 fee if youapply onlineand have money automatically withdrawn from your bank account each month.
Mistake #3:You hire a tax settlement company.
The smart strategy:Negotiating with the IRS yourself.
If youre seriously delinquent on taxes, you may need professional help.
But most people who owe taxes wont need the help of a pro.
The Federal Trade Commission warns that the vast majority of taxpayers dont qualify for the programs theyre hawking.
Many people who use these companies dont get tax relief.
Instead, they wind up deeper in debt due to high upfront fees and unauthorized charges.
You typically dont need assistance to set up a payment plan.
Youll still owe taxes, and interest and penalties will continue to accrue.
The IRS will require you to show proof of significant hardship and document your income, spending and assets.
you could do this either with a lump-sum payment or with monthly installment payments.
The IRS rejects most applications for an offer in compromise.
Use the IRS Offer in Compromisepre-qualifying screenerto determine whether this could be an option.
Mistake #4:You take a 401(k) withdrawal.
Wed recommend an installment plan hands-down over touching your retirement money.
With an early401(k) withdrawal, youll be racking up more taxes just to pay your taxes.
Your distribution will be taxed as ordinary income, plus youll pay a 10% penalty.
A 401(k) loan may be a better option since you wont be penalized.
But its still risky.
Otherwise, its treated as an early withdrawal.
If youre using retirement money to pay taxes, start with yourRoth IRAif you have one.
Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder.
She writes the Dear Penny personal finance advice column.
Send your tricky money questions to[email protected].
(Can you sense my millennial sarcasm there?)
You know which ones were talking about: rent, utilities, cell phone bill, insurance, groceries…
