The 7 Worst Things You Can Do If You Owe the IRS
You’re in debt to Uncle Sam. This probably isn’t a great feeling, but you have to face it.
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Maybe you have the money to pay your tax bill or perhaps you don’t. If not, you have many options, so don’t take any of the following.
Using a Credit Card To Pay Your Taxes
Charging IRS debt to your credit card might be easy in the short term, but doing so can be a costly choice.
“The IRS interest rate changes quarterly, but it’s hovered around 8% in recent years,” said Brad Paladini, tax attorney and owner of Paladini Law, a tax law firm. “Credit card interest is usually around 22%, meaning that if a taxpayer uses a credit card to pay their taxes, they are paying almost three times as much in interest than if they paid the IRS directly.”
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Failing To Stay in Compliance With the IRS
“The IRS is usually very willing to arrange a resolution for past-due tax debt, whether it be an installment agreement, an offer in compromise or hardship status,” Paladini said. “But the IRS requires that the taxpayer remain ‘current’ with the taxes.”
Going forward, he said this means you’ll need to file all returns on time and pay all future taxes on time.
“If the taxpayer fails to do so, she’ll default whatever arrangement was made with the IRS,” he said.
Ignoring the Problem Until It’s Too Late
“Taxpayers will know there’s an outstanding tax debt, but will ‘bury their head in the sand’ and ignore it,” Paladini said. “Eventually, the IRS will wipe out their bank accounts or garnish their wages to recoup their money.”
If it comes to this, he said it will be much harder to try and resolve than if you had proactively reached out to the IRS to settle it.
Not Understanding Your Options
If you owe money to the IRS, Paladini said, you have six payment options, including an installment agreement, offer in compromise, currently non-collectible status, penalty abatement, innocent spouse relief and bankruptcy.
“Each of these options has separate requirements,” he said. “Trying to navigate that path on your own can be extremely difficult.”
If you need help navigating what’s best for your unique situation, he said you should reach out to a tax professional.
Failing To File
“When you owe and you do not file by the tax deadline, then you will be penalized for failing to file, unless you file an extension,” said Kathy Alfaro, owner and tax strategist at Alfa Tax Service. “If you fail to file by the extension deadline, then you will pay a failure to file penalty.”
She emphasized the importance of knowing the rules.
“When you owe and you do not pay by the tax deadline, then you will be penalized for failing to pay,” she said. “There is no extension for this penalty. This is why filing an extension with a payment will help.”
Ignoring the IRS
If you get behind on your taxes, ignoring correspondence and notices from the IRS is the worst thing you can do, said Sallie Mullins Thompson, CPA principal and managing member at Sallie Mullins Thompson, PLLC. She recommended responding by phone or in writing as soon as you can.
“Avoiding communication with the IRS is another bad idea and will only harm you,” she said. “If you do not respond, your wages could be garnished and liens [and/or] levies can be placed upon your home, car and other property.”
Additionally, she said the penalties for interest and late payments will increase, causing your tax bill to grow larger.
Paying With Money From Your Retirement Account
“Taking money from your retirement account to pay taxes should be considered only as a last resort,” Mullins Thompson said. “You will have to pay taxes in the next year on the money you withdrew, plus a 10% penalty on top of that tax payment.”
Beyond that, she said the money will not be earning anything for your future retirement.
How To Get Out of Tax Debt
If you owe money to the IRS, you want to get out of debt as quickly as possible. There are many ways to do this.
The IRS offers several options, including a short-term extension of up to 120 days, an installment agreement, an offer in compromise or temporarily delaying collection by reporting your account as currently not collectible until you have the money to settle your debt.
If you feel like you can’t tackle your IRS debt on your own, you may want to reach out to a professional. Some tax debt resolution companies, such as Tax Relief Advocates, offer a free consultation where they’ll review your situation and suggest a path forward.
Depending on the amount you owe and your unique circumstances, you could also consider taking out a personal loan. Alternately, you could pick up a side gig that allows you to earn the extra cash needed to pay off your tax debt.
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