Instead of enjoying a tax refund this year, you are surprised to find that you owe Uncle Sam. Even worse, you do not have the money to pay these surprise taxes. What can you do?
One thing you definitely do not want to do is ignore the tax bill. That will only make your situation worse in the long run as you rack up fees and penalties. Make sure that you file your taxes on time and choose one of the following options.
File Form 9465 as early as possible because it may take up to thirty days for the IRS to let you know if it has been approved.
The IRS does not consider a mere inconvenience worthy of a hardship, and you will have to explain why borrowing the money is not a viable option for you. You must supply a statement of assets and liabilities at the end of the previous month prior to filing the form and list all income and expenses for the prior three months. If you have enough advance warning, we suggest contacting the IRS first to see if you are likely to qualify for a hardship situation.
- Loans/Credit – Depending on the size of the tax bill, it may make sense to take out a loan (if you can qualify) or pay the tax bill via credit card. You will have to estimate when you can expect to pay the bill, and do a cost-benefit analysis on whether the interest you will pay on the credit card or loan is greater than the potential penalties that you would pay the IRS for a delayed or partial payment. Betterment Head of Tax Eric Bronnenkant puts it very succinctly, "Your credit card is usually a high-interest option, but it is an option."
Do not forget to include the fees associated with paying taxes by credit card with an approved vendor (generally from 1.87% to 2% of the total tax bill). "The IRS isn't willing to absorb any interchange fees, like VISA, Mastercard, and American Express fees," warns Bronnenkant. "Let's say they charge 2% per round number, so if you use your credit card, you're basically going to have to pay an additional 2% to cover the fees."
Before making the final payment, contact the IRS to verify the correct amount of accrued interest, especially if you are paying before the end of the extension. Do not wait on a bill from the IRS.
In general, your best bet to limit the damage is to contact the IRS before the filing date and pay whatever you can at the regular filing deadline to minimize the damage. Investigate the options above to see which one best fits your situation, and do not ignore the problem. Do not expect the IRS to just go away and leave you alone. It won't happen.
"Filing for an extension doesn't get you an extension to pay," warns Bronnenkant. "Let's say you don't pay by April 17th, well then, you're still going to have to pay interest on that money later anyway. Requesting an extension doesn't solve any problems, if your only problem is that you expect to owe money."
The 2017 Tax Cuts and Jobs Act and the 2018 Bipartisan Budget Act may cause many changes in your tax situation next season. Try to prevent being caught out by an unexpected tax bill in 2019 by doing your homework on the new laws now.
This article was provided by our partners at moneytips.com.
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