Discovering that you owe more in taxes than you can pay can be frightening. Maybe your withholding was too low, you had self-employment income without estimated payments or you sold investments for a large gain. Whatever the reason, the most important thing to know is that you have options, and ignoring the problem is the worst one.
First, file your return on time, even if you can't pay the full amount. The penalty for failing to file is generally much larger than the penalty for failing to pay. Filing on time, or requesting an extension to file, can significantly reduce the penalties you face. Remember that an extension gives you more time to file, not more time to pay.
Pay what you can, as soon as you can
Interest and penalties are charged on unpaid balances, so paying as much as possible by the deadline reduces your total cost. Even a partial payment helps. You can pay online through the IRS website, by phone, by mail or through your tax software.
If you need more time, the IRS offers payment plans. A short-term payment plan gives you additional time, generally up to 180 days, to pay your balance in full. A long-term installment agreement lets you pay over time with monthly payments. Many taxpayers can apply online, and setting up automatic payments can make it easier to stay on track.
In cases of real financial hardship, other options may be available. An offer in compromise may allow some taxpayers to settle their tax debt for less than the full amount owed, based on their ability to pay, income, expenses and assets. The IRS may also temporarily delay collection if paying would prevent you from meeting basic living expenses.
You may also qualify for penalty relief. Taxpayers with a good compliance history may be eligible for first-time penalty abatement, and relief may be available if you can show reasonable cause, such as a serious illness or natural disaster, that prevented you from filing or paying on time.
Prevent it from happening again
Once you've addressed the balance, review your withholding with your employer, or set up quarterly estimated payments if you have income without withholding. A midyear tax checkup can help you avoid another surprise next spring.
The advisors at Tax Pay Advisor help clients in Little Rock and across Arkansas understand their options, set up payment plans and build a plan to stay current. Contact us for confidential help with a tax balance.