We are days away from the dreaded tax filing deadline. That’s right — by April 18, we’re expected to have organised our jumble of income statements, daycare bills, and expense receipts sufficiently to inform the government of our 2021 earnings. Then it’s up to the government to inform us whether we overpaid and are due a refund, or whether we’re stuck with a tax bill.
To begin, we’ll discuss what happens if we decide not to file this year. As tempting as it may be to pretend we don’t owe taxes, the United States government does not take kindly to our failure to pay – even for a single year. Underpayment can occur to anyone and should be addressed immediately.
What happens if we default on our payments?
Assume that 2021 was a prosperous year financially (we’re supposing here), and you discover that you owe $5,000 to the federal government. According to the IRS, the Failure to Pay Penalty is 0.5 percent of the unpaid amount per month.
The IRS adds $250 to your bill the first month you are late ($5,000 x 0.5 percent = $250), and they continue to do so for each month or portion of a month you are late. The silver lining is that the penalty will not exceed 25% of the amount owed. That would be $1,250 in this case ($5,000 x 25% = $1,250).
That does not have to be the case.
If you complete your taxes only to discover that you owe money, there is a way to resolve the situation if you are unable to pay immediately: You may apply for a payment plan.
Continuing the scenario, suppose you owe $5,000. Generally, any balance less than $10,000 qualifies automatically for an instalment agreement. As long as you promise to pay it off within three years, you simply inform the IRS of the monthly payment amount you can afford.
While low-income taxpayers are not charged a set-up fee, suppose you are not low-income and must pay a fee to establish the instalment agreement.
The cost of an IRS instalment plan.
As you can see, allowing the IRS to deduct the agreed-upon monthly payment automatically from your bank account is the least expensive way to establish an instalment agreement.
Nota bene: If you can pay off the tax bill in less than 120 days, setting up an agreement is free.
There is no stigma attached to tax debt; after all, it is relatively simple to overpay or underpay taxes. If you owe taxes this year, do not put off dealing with the situation. While it will not be painless, the sooner you address it, the sooner you can move on to more pressing issues.