What to do When You Owe Taxes

So you’ve sat down and filled out your tax return this year, but now you’ve got another problem. You owe Uncle Sam more money. Ouch. It’s obviously better to get a refund or pretty much break even, but there are times when things change and you use TurboTax to figure out what you owe, you need to come up with some extra cash. Here’s what you need to know.

Pay on Time

Above all else, you need to pay what you owe by the tax filing deadline, which this year is April 18th. I know what you’re thinking. You can just file an extension and get more time, right? Sadly, that isn’t how it works. An extension does give you additional time to file your return, but it does not extend the payment deadline. When you don’t file your taxes on time you’re hit twice.

First, there is a failure to pay penalty. The penalty is 0.5% for each month the tax is not paid in full. There is no maximum limit to the failure-to-pay penalty. The penalty is calculated from the original payment deadline. Second, the IRS assesses interest on unpaid taxes. The interest is calculated based on how much tax you owe, computed daily, at a current rate of 4 percent per year.

As you can see, not paying by the deadline can make matters even worse, so the sooner you realize you owe money, the faster you should get going on coming up with the cash to pay by the deadline. If something doesn’t seem right with your taxes and the deadline is looming you may still want to file an extension so you can have a little more time to go over your return, but at the very least you better mail the check for the amount it says you owe right now. You can always get money back later if you realize there was a mistake.

Set Up a Payment Plan

If the amount is substantial and you just don’t have the money available to pay what you owe in full, you may want to look into setting up a payment plan with the IRS. The IRS does offer an installment agreement that allows you to pay your taxes over time, but it can still cost you.

You will spare yourself the stiff penalties of not paying on time, but there is a fee to enroll in the program. It’s $105 to set up an agreement, or just $52 if you establish automatic payment through your bank account. There are additional fees to make changes to the agreement once in place. Obviously, you need to weigh your options based on how much tax you owe. If you’re having trouble coming up with $500 by the tax deadline it may not make sense to pay the setup fee for the installment plan if you can have the money to pay in full a few weeks after the deadline. Here, the interest and penalties of just being slightly late is less than the fee.

Using Other Sources of Money

If for whatever reason you don’t set up an installment plan you can always use funds from alternative sources to pay your tax bill in full. If you have some emergency savings you could use that. Or maybe try to sell some stuff you don’t need to get some extra money, and so on. What you typically don’t want to do is tap into sources of money that will penalize you or also charge you interest. For example, paying by credit card. Unless you have a zero percent or very low interest card, the rates on a credit card may outweigh the penalties assessed by the IRS. Granted, it’s better to owe a bank money versus the IRS, but be careful when weighing that option. Another thing people mistakenly do is tap into retirement accounts to pay Uncle Sam. This can be even worse because most retirement accounts will penalize you for early withdrawals, which you may also owe even more taxes on that amount next year. In addition, you’re jeopardizing your future just to settle a one-time bill. Don’t rob Peter to pay Paul.

Whatever you decide, the sooner you find out you owe taxes the better. You still have a few weeks so if you haven’t done your taxes yet, get on it. If it looks like you will owe some money this year you’ll have a few weeks to either get some money together or put a plan in place to come up with the money or get in touch with the IRS about a payment plan.

Comments (13) Leave your comment

  1. I owe the state money and set up to have the money come out on April 15. I won’t have the money in my account until the 18th. Is there someone I can call to push the date out to the 18th?

  2. I e-filed my federal return and it was accepted. I owed and amount and printed the 1040-v form,but do I need to enclose a copy of my return and w-2′ 1099′s? I thought it said somewhere not to send them because I e-filed?

    • Hi Diane,
      No you don’t need to enclose a copy of your tax return if you e-filed. Make sure you include your social security number and tax year payment is for.
      Thank you,
      Lisa Greene-Lewis

  3. What if I did my turbo tax and it said I owe money for state. I set it up to come out on the 1st of the month but it has not came out yet. What do I need to do.

  4. why does it say we owe taxes we’ve done everything the same as last year. cause nothing has changed, and how do they figure we owe that much, and how can we speak to someone about it. it’s just not making since why we owe foe?

  5. IRS says I still owe money! I used turbo tax. What went wrong? How can I speak to a person? I can’t find a phone number to call!!!

  6. I have always received a refund via Turbo-Tax, but this year I owe the IRS. Can I complete the transaction electronically through Turbo-Tax (essentially the reverse of a refund)? Or do I have to print it out and send in a check?

    • Hi Eric,
      You can file electronically whether you owe or receive a refund. TurboTax will guide you on how to send what you owe.
      Thank you,
      Lisa Greene-Lewis

  7. This may help Evelyn as well as others. I find that I owe more than expected so here is a tip for others. If you do have a well-established credit card they periodically send you interest free “checks” you can deposit into your bank account and write a check for your taxes once the credit card “Check” clears your bank. Around this time of year checks are around 0% for 12 mos or 1.99% for about 18 mos. BUT there is a 4-5% transaction fee for the entire amount borrowed. It takes awhile for these checks to clear so if you need it faster call your credit card company to get them to electronically deposit them into your checking account. Same rules apply or so. A bank “interest only” loan against one’s home gives time to pay off the principal and the interest is tax deductable. I’m in no way a tax advisor so get professional advice before you try any suggestion. All I really know for sure is I HAVE TO PAY UNCLE SAM INSTEAD OF VACATIONING this year!!!!

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