As Benjamin Franklin once said, “In this world, nothing is certain except death and taxes.” But what happens if we cannot pay our tax bill? The Internal Revenue Service (IRS) offers different options, one of which is the ability to make payments in a payment plan. There are different options, and these plans are basically an agreement between the taxpayer and the IRS to pay the owed taxes over an extended timeframe.
What happens if I do not pay my taxes?
We cannot simply ignore our tax obligations. A failure to pay our taxes can, in the best-case scenario, result in penalties and interest. In the worst-case scenario the IRS could claim intentional avoidance of tax obligations and pursue criminal charges. If they can gather evidence to support these claims, they could pursue criminal tax fraud charges which could lead to jail time.
There are options for those who cannot pay their tax bill. As noted above, one example is to put together a payment plan.
What are the pros and cons of a repayment plan?
Instead of having to pay off our tax bill in one lump sum, a repayment plan allows us to spread these payments out into smaller, more manageable sums over a longer period of time.
It is important to note that the final bill can end up being more than the actual owed amount. This is because additional fees are added to the tax bill. Fees can include a set-up fee, interest, and penalties.
Can I pay off the remaining balance early?
Yes, the taxpayer can pay off the remaining balance on the payment plan at any time. Alternatively, you can accelerate your periodic payments by making them bigger or more frequent than agreed on in the installment agreement. Remember, the outstanding taxes continue to attract interest even under a payment plan. Therefore, if we pay ahead of schedule, the overall interests and penalties will reduce compared to sticking to the payment timeline.
As discussed in more detail in a previous post, available here, it is also important to carefully consider how paying off tax debt early could impact our overall financial well being. Early payment may not be wise in the long run if it requires a high interest loan or if we pay off the debt using early withdrawals from retirement savings that result in hefty penalties.
Is there anything else I should know?
While it is possible to pay off the payment plan early, the most crucial thing is to stay current with payments. Falling behind can result in stiffer penalties and the potential revocation of the repayment plan.
If unable to meet monthly payments, it is important to inform the IRS beforehand. Learning more about the options available, including reducing the monthly payments to align with current financial status, will help taxpayers navigate the whole process of revising a current payment plan.