Owing taxes is more prevalent than most are aware. For individuals, it could be because not enough is being withheld from paycheck, additional income from freelance writing or design, or a business on the side. Underpayment of estimated taxes or overlooking deductions can result in a tax bill for small businesses.
The IRS says that more than 10 million Americans had back taxes due in 2023. It’s not unusual—but it does need to be addressed.
Know What You Owe and When It’s Due
Begin by checking your IRS tax transcript or notice. This will allow you to verify how much you owe and when it is due. Penalties and daily interest can be charged on late payments. The earlier you check, the better choices you’ll have.
Overdue deadlines rapidly add up. The IRS generally charges 0.5% of the unpaid tax for each month you wait, up to 25%.
The Risk of Ignoring a Tax Bill
Not paying tax debt will not make it go away. Instead, it can result in severe penalties such as wage garnishment, bank levies, or tax liens. If you receive a notice from the IRS, don’t delay responding.
Even if you’re unable to pay immediately, the IRS is generally willing to negotiate payment plans. But you must communicate.
For Individuals: Steps You Can Take
If you are a debtor taxpayer, here are some easy choices:
- Make a payment plan: The IRS has short-term (120 days or less) and long-term (installment agreement) plans.
- Make an Offer in Compromise: If you are eligible, you can pay off your debt for less than what you owe tax.
- File for penalty abatement: If you are a first-time debtor or have reasonable cause, the IRS can waive certain penalties.
- Temporarily halt collection: The IRS may declare your account “currently not collectible” if you’re experiencing financial difficulties.
For Small Business Owners: Stay Ahead of Tax Debt
Business operations incur tax obligations along with personal earnings:
- File even if you can’t pay: Prevent failure-to-file penalties by filing returns promptly.
- Quarterly estimates check: Avoid quarterly tax underpayment, a frequent affliction for firms.
- Create a dedicated tax account: Saving money regularly spares the surprise of tax time.
- Think about getting expert help: A tax expert can guarantee compliance and optimize deductions.
As of 2022, the IRS reported more than $50 billion in unpaid business taxes, a trend on the rise among small businesses.
How to Set Up a Payment Plan with the IRS
Applying for a payment plan is actually quite easy:
- Utilize the IRS Online Payment Agreement tool.
- For less than $50,000 of debt, you can often create one without any additional forms.
- Be prepared to choose an amount of a monthly payment you can afford to make.
- You can arrange for automatic payments drawn from your checking account so you don’t ever miss a due date.
Stay current on payments—missing a payment would render the whole agreement in default.
When It’s Time to Call in a Tax Pro
Sometimes you just can’t do it alone. If you have no idea how much you owe, you are being penalized, or have received a notice you don’t comprehend, talking to a tax professional may save you stress, dollars, and time.
Enrolled Agents, CPAs, or attorneys with tax experience can battle back at the IRS on your behalf and ensure that you don’t leave anything on the table.
How to Avoid Owing Tax in the Future
Once you’ve paid up your current one, do a few things to avoid it happening again:
- To make sure the right amounts are taken out of your paycheck, check your W-4.
- Make quarterly estimate payments if you’re self-employed
- Monitor income and deductible expenses so you can report them
- Get assistance from accounting software or a bookkeeper
Budgeting lowers the likelihood of future tax surprise.
Conclusion
If you’re asking yourself what to do if you owe tax, the first thing to do is move early. As a citizen or small businessperson, there are obvious options ahead of you. From payment plans to penalty abatement, the IRS has options—but it’s your move to make. Tax debt will not pay itself, but neither does it have to dominate your life.
FAQ’s
Will the IRS pay off my tax debt?
Perhaps, under Offer in Compromise or penalty abatement if you’re eligible. It’s all dependent on your situation and history.
Can I be incarcerated because I owe taxes?
Simply owing tax won’t land you in jail. Tax fraud or willful failure to pay will have you answering to the law, though.
What if I cannot pay anything currently?
You may request a temporary collection hold if you prove economic hardship. Your account may be noted by the IRS as “currently not collectible.”
How much time does the IRS have to collect from me on my tax debt?
The IRS usually has 10 years from the original assessment date of the tax to collect from you.