5 Costly Mistakes To Avoid If You Owe The IRS

Nobody likes owing money, especially to the IRS. But sometimes, tax season doesn’t go as planned, and you end up with a tax bill. While it may be tempting to ignore the debt or delay dealing with it, that’s one of the worst things you can do. The IRS has a long memory, and penalties can pile up fast. Here are the top five mistakes to avoid if you owe the IRS—and what you should do instead to get your financial situation back on track.

Avoiding Common IRS Debt Mistakes

When faced with IRS debt, many taxpayers unknowingly make errors that can lead to more penalties and financial stress. Knowing what to avoid is critical to minimizing the impact on your finances.

Mistake #1: Skipping Your Tax Return Because You Can’t Pay

It’s a common misconception that if you can’t pay your taxes, it’s better not to file at all. But in reality, failing to file your return only compounds the problem. The IRS will automatically impose a 5% failure-to-file penalty for every month your return is late, maxing out at 25% of the total owed. And that’s not even accounting for the interest that will accumulate on your unpaid balance.

Filing your return, even if you can’t pay immediately, prevents these penalties from getting worse. Once you’ve filed, you can start exploring payment options that fit your financial situation.

• 5% penalty per month, up to 25% total for not filing.
• Interest continues to accrue on unpaid taxes.
• Filing keeps the penalties from snowballing.

Mistake #2: Not Filing an Extension When You Need More Time

If you’re struggling to pull together all your tax documents by the April deadline, don’t panic—requesting an extension can give you some breathing room. The IRS allows you to file for a six-month extension, pushing your filing deadline to October. However, it’s important to understand that this only extends your time to file, not to pay.

If you owe taxes and don’t pay by April, you’ll still face a 0.5% monthly penalty on the unpaid balance, up to 25%. Filing for an extension helps you avoid the failure-to-file penalty, but paying your taxes on time is key to keeping penalties in check.

• Extension gives you six extra months to file, not pay.
• Failure-to-pay penalty is 0.5% per month on the balance.
• Make partial payments to minimize penalties if you can’t pay in full.

Mistake #3: Ignoring Payment Plan Options When You Can’t Pay in Full

If paying your tax bill in full isn’t realistic, don’t ignore it—set up a payment plan. The IRS offers several options for taxpayers who need more time. For example, if you owe less than $50,000, you may qualify for an online payment plan that allows you to spread payments over time—up to 72 months.

If you don’t qualify for the online option, you can submit Form 9465 by mail to request an installment agreement. Keep in mind that penalties and interest will continue to accrue while you’re on the payment plan, but it will prevent harsher measures like liens or wage garnishments.

• Payment plans are available if you owe less than $50,000.
• Installment plans spread payments over up to 72 months.
• Penalties and interest continue, but more severe actions are avoided.

Mistake #4: Underestimating the Serious Consequences of Ignoring Tax Debt

Ignoring your tax debt doesn’t just lead to penalties—it can lead to serious consequences that disrupt your life. If your debt remains unpaid, the IRS can take extreme measures like garnishing your wages, placing a lien on your property, or even revoking your passport. These actions can severely impact your financial stability and mobility, and the longer you wait, the harder it becomes to resolve the issue.

Understanding the real risks involved can motivate you to address your debt before it escalates.

• The IRS can garnish your wages to collect unpaid taxes.
• Property liens make it difficult to sell or refinance assets.
• Unpaid taxes can result in passport revocation, affecting travel plans.

Mistake #5: Using the Wrong Borrowing Option to Pay Off Tax Debt

When you owe the IRS and don’t have the cash to pay, borrowing might seem like the only solution. But not all borrowing options are created equal. Before you turn to a credit card, personal loan, or home equity loan, make sure to carefully compare interest rates, fees, and repayment terms.

For example, charging a large tax bill to a high-interest credit card can lead to significant long-term costs. Rushed decisions can dig you into a deeper financial hole. Instead, take the time to evaluate all your options to ensure you’re making the most financially sound choice.

• Compare interest rates and fees for credit cards, loans, and home equity lines.
• Avoid high-interest borrowing that could worsen your financial situation.
• A slower, planned approach to borrowing may save you money in the long run.

Proactive Tax Planning Tips to Avoid IRS Issues

While avoiding mistakes is key to staying on track, proactive tax planning can prevent these issues from arising in the first place. Proactive tax planning doesn’t just minimize stress at tax time—it can also help you keep more of your hard-earned money.

Here are a few key tips to help you stay on top of your taxes and avoid surprises when it’s time to file:

• Stay Organized Year-Round: Keep tax-related documents—such as receipts, W-2s, and 1099s—organized and easily accessible throughout the year. This will save you time and ensure you don’t miss out on deductions or credits.
• Take Advantage of Deductions and Credits: Missing out on deductions or credits can lead to a higher tax bill than necessary. Common deductions include business expenses, home office costs, and charitable contributions. Explore credits like the Earned Income Tax Credit (EITC), which can reduce the amount of tax owed or result in a refund.
• Adjust Your Tax Withholding: If you find yourself owing taxes year after year, revisit how much tax is being withheld from your paycheck. Adjusting your W-4 can help ensure you don’t face a big bill at tax time.
• Consult a Tax Professional: Navigating complex tax laws can be tough. Working with a professional, like Austin & Larson Tax Resolution, can ensure your tax situation is in good standing and that you’re maximizing tax savings.

Taking these proactive steps will help you stay in control of your finances and ensure tax season goes smoothly year after year. Don’t wait until the last minute—start planning now!

Summary: Key Steps to Handle IRS Debt Effectively

Dealing with tax debt can feel overwhelming, but knowing what to avoid and taking the right actions can make a world of difference. Whether you owe a small amount or a substantial sum, ignoring the problem will only cause it to grow. Filing your tax return on time, requesting an extension when needed, setting up a payment plan, and understanding the consequences of unpaid taxes are all critical steps in managing your debt.

By being proactive and informed, you can take control of your financial future and avoid further penalties. If you’re feeling uncertain about how to handle your IRS debt, don’t wait until it’s too late. Contact Austin & Larson Tax Resolution today to discuss your options.

Key Takeaways:

• File your tax return on time, even if you can’t pay, to avoid failure-to-file penalties.
• Request an extension if you need more time to file, but remember that payment is still due by the April deadline.
• Set up a payment plan if you can’t pay your tax bill in full to avoid harsher consequences like wage garnishment or liens.
• Understand that the IRS can take serious actions such as garnishing your wages, placing liens, or revoking your passport if you don’t address your tax debt.
• Carefully compare borrowing options before using a loan or credit card to pay your tax bill to avoid high-interest debt.

Frequently Asked Questions (FAQs)

1. What happens if I don’t file my tax return on time?
   The IRS will impose a penalty of 5% per month on the unpaid taxes, up to 25% of the total amount you owe. You’ll also accrue interest on the unpaid balance.
   
2. Can I still get a payment plan if I owe the IRS?
   Yes, the IRS offers installment plans for taxpayers who owe less than $50,000. You can apply online or by mail using Form 9465.
   
3. Does filing an extension mean I get more time to pay my taxes?
   No, filing an extension only gives you more time to file your return. Taxes are still due by the April deadline, and failure-to-pay penalties will apply if you don’t pay on time.
   
4. What’s the penalty for not paying my taxes by the deadline?
   The penalty is 0.5% of your unpaid taxes per month, up to a maximum of 25% of the total amount owed.
   
5. Can the IRS take my property if I don’t pay my taxes?
   Yes, the IRS can place a lien on your property, which can make it difficult to sell or refinance. In extreme cases, they can also seize property.
   
6. How can I avoid IRS penalties if I can’t pay my taxes?
   To avoid penalties, file your return on time and request a payment plan with the IRS. Making partial payments can also reduce the amount of penalties and interest.
   
7. How long do I have to pay off my IRS tax debt?
   If you’re on a payment plan, the IRS typically gives you up to 72 months to pay off your tax debt. However, interest and penalties will continue to accrue until the balance is paid.
   
8. What should I do if I can’t afford to pay my taxes at all?
   If you can’t pay, it’s important to contact the IRS or a tax professional like Austin & Larson Tax Resolution to explore options such as installment agreements or an Offer in Compromise, which may allow you to settle for less than you owe.