So you’ve finished your 2016 tax return just before the April 18th deadline and have a list of how you are going to spend your tax refund, but it turns out that you owe money. What should you do if you can’t afford to pay the tax now? Here are our suggestions:
1. Minimize penalties. There are separate penalties for filing your tax return late (5% per month) and paying your taxes late (0.5% per month). So you should still file your tax return or extension by April 18th, otherwise your problems will be much worse. If you are unable to file your tax return by April 18th, use Form 4868 to request an extension until October 16th.
2. Request an installment agreement. If you owe $50,000 or less, you can file an online application to pay your tax bill for up to 72 months. You will need to have filed your 2016 tax return to request the agreement and it is important that you stay current with the payment schedule. Click here for the online application.
3. Request an Offer-in-Compromise. This is an option for taxpayers who the IRS believes don’t have the assets or income potential to pay their tax bill. For these taxpayers, the IRS actually reduces the tax that is due. A deal like this is tough to get. The IRS has a Pre-Qualifier tool on their website.
It is also important to understand why you owe tax and take steps to plan for future tax payments so that you are not in the same position next year. Consider increasing your withholding or making estimated tax payments for 2017 to prepay the tax due over time or set the money aside in a savings account to fund the payment next April.