With tax season coming to an end, many consumers are wondering how they are going to pay their outstanding tax bill. When it comes to tax debt, it is best to pay it off as quickly as possible and in one lump sum payment. However, payment in full is not always possible. Fortunately, there are options available for those struggling with tax debt.
The official tax filing deadline was May 17, and all outstanding 2020 tax bills were technically due at that time. If a taxpayer was not able to pay the bill by this date, interest and penalties will begin accruing on the outstanding amount owed. The penalty for not paying tax bills in full is 0.5 percent of the unpaid amount monthly until the full amount is paid. On top of interest, penalties will add up to 25 percent of the total amount owed. Because of these penalties, the quicker the tax bill can be paid, the better.
Personal Loan
If the consumer does not have the cash on hand to pay off the debt immediately, another option could be to take a small personal loan to pay what is owed. If the consumer has good credit, he or she may even be able to secure a good interest rate on the loan. By using a personal loan to pay off what is owed, the consumer will avoid the IRS penalties and avoid the possibility of having a tax lien placed on his or her property. Additionally, the monthly payments, until the amount is paid in full, will be predictable and measured over time. However, with a personal loan, the consumer is still increasing his or her debt load, which can also negatively affect his or her credit score.
Zero Interest Credit Card
Alternatively, the taxpayer could use a credit card to pay off the tax debt. While their interest rates tend to be higher than a personal loan or IRS penalties and interest, paying the debt off in full does prevent the individual from incurring IRS penalties or even a tax lien. Many credit cards offer zero percent APR introductory periods, and if the taxpayer can pay the amount off in full before that period ends, the debt can be paid off interest free. This strategy of paying your tax bill with a credit card can translate to thousands of dollars in travel rewards or cash back. It is important that the cardholder not add to the balance owed or else the debt will never be paid off in the end.
Alternative Options
The IRS offers a few ways to pay off debt over time. If the taxpayer owes $50,000 or less, he or she can request a long-term payment plan involving monthly payments until the debt is paid in full.
If the taxpayer is experiencing financial hardship, he or she can request that the IRS put a temporary hold on putting the unpaid taxes into collections. Once the person’s financial situation improves, he or she will still be on the hook for paying what is owed, plus interest and penalties, but at least the account will not be put into collections.
The taxpayer may also have success in requesting the IRS waive the penalties for not paying taxes on time, so long as the following requirements are met:
- The taxpayer did not have to file a return or had no penalties for three years before this tax period;
- He or she is current on the most recent tax return or requested and received a filing extension; and
- The taxpayer paid or is making payments of any outstanding tax liabilities owed.
What the penalty abatement means is the taxpayer will not be charged interest on the penalty that the IRS waives. However, he or she will still owe interest on the total outstanding tax balance.
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If you have questions on this topic or are in financial crisis and considering filing for bankruptcy, contact an experienced Miami bankruptcy attorney who can advise you of all of your options. As an experienced CPA as well as a proven bankruptcy lawyer, Timothy Kingcade knows how to help clients take full advantage of the bankruptcy laws to protect their assets and get successful results. Since 1996 Kingcade Garcia McMaken has been helping people from all walks of life build a better tomorrow. Our attorneys’ help thousands of people every year take advantage of their rights under bankruptcy protection to restart, rebuild and recover. The day you hire our firm, we will contact your creditors to stop the harassment. You can also find useful consumer information on the Kingcade Garcia McMaken website at www.miamibankruptcy.com.