You went through the painstaking process of completing your tax return and you were fully expecting to break even or possibly receive a small refund—only to be blindsided by the news that you actually owe more money to the IRS. This kind of scenario happens a lot more than you might think, and it can be incredibly stressful.
Before you go into panic mode, though, there are a few options for handling an unexpected tax bill without having to take out a loan or completely drain your bank account.
Common Reasons You Might Owe
First, understand what happened that caused you to owe money when you weren't expecting it. Common reasons a taxpayer may end up owing money when they file include:
- Insufficient withholding - If your employer isn't withholding enough from your paychecks, this can lead to underpayment. It might be time to update your W-4 form to avoid this same problem next year.
- Freelance income - If you earned freelance income for a side hustle, this income may not have been taxed at all. If you didn't pay estimated taxes on this income, you'll end up owing it (along with potential penalties/interest) when you file.
- Unemployment benefits - If you received unemployment benefits throughout the year, these may not have been taxed when you received them. However, this compensation is considered taxable income, so you might be responsible for it when you file.
- Major life changes - Getting divorced or having a child who no longer qualifies as a dependent on your return can affect your taxes in unexpected ways.
Options for Handling Your Tax Bill
Regardless of why you owe money on your taxes, there are some options available if you're having trouble settling up.
See if You're Eligible for an Extension
First (and most ideally), check to see whether you may be eligible for an extension on your tax return. If you haven't filed yet, this will give you additional time beyond the typical April 15 deadline to further review your return and check for anything you might have missed. If your return is showing that you owe money unexpectedly, this will also give you more time to come up with money owed, although it's important to remember that you could be responsible for interest on the amount paid after the filing deadline.
Explore Online Payment Plans
The IRS offers payment plans to taxpayers who prefer to break their payments into smaller and more manageable amounts over time. This includes both short- and long-term payment plans to suit each taxpayer's individual needs.
Most taxpayers should qualify for these programs, so check the IRS website directly to explore your options and see if you could be eligible. If so, you could take anywhere from 180 days to 10 years to pay off your tax balance (depending on the plan you select). Keep in mind, however, that these payment plans may be subject to interest and other fees that could add up—especially if you take a longer time to pay off your balance.
Request a Temporary Delay of Collection
If you don't qualify for a payment plan through the IRS, don't panic. There are still some other options you may be able to explore. Consider, for example, contacting the IRS directly and requesting a temporary delay of collection. If you're eligible, the IRS may be required to delay the collections process until your financial situation has improved. Keep in mind if you go this route, however, that interest may continue to accumulate during the delay.
Consider a Tax Debt Settlement
In some cases, taxpayers who owe money may be able to settle their tax burdens for less than the amount that's technically owed. This is known as a debt settlement, and the process is often handled by an independent third party that negotiates the settlement on the taxpayer's behalf.
If you owe a significant amount in taxes that you don't expect to be able to repay anytime soon, it may be worth reaching out to a debt settlement professional to determine whether this could be a viable option. You can also check the IRS website directly and use the Offer in Compromise Qualifier tool to see whether you could qualify for a settlement without involving a third party.
Additional Help
Facing an unexpected tax debt can be stressful, but with so many different options available, you should be able to get the help you need. Above all else, it's important to determine what caused you to owe additional taxes in the first place so you can avoid running into the same problem again next year. If you need help navigating this process, please contact our Tax Services team.