It is a situation no one wants to be in – instead of getting a refund, you own money. While many self-employed individuals and small business owners typically expect to pay the Internal Revenue Service (IRS), there are times when you might owe and not expect.
The reasons can include that you withheld less from paycheck, made extra income not subject to withholding or there were changes in your tax return. If your kids grew up and moved out, they can't be claimed as dependents and that could result in you owing the taxman. Likewise, if you refinanced your home at a lower interest rate that interest deduction may have fallen.
Then there are the changes in the tax code that could make a difference in your tax bill. If you didn't adjust the withholding when things changed, you may end up owing money instead of getting a refund.
Last year approximately 125 million Americans received a tax refund, which meant that about 43 million Americans either broke even or owed money according to the IRS. Breaking even is actually the best place to be – even if some people like to receive that refund. That meant you didn't give the government an interest-free loan.
Owing money is something that can be upsetting – at least if you're prepared for it.
However, "don't panic."
Those are actually the words from the IRS, which also added, "You may qualify for a self-service, online payment plan (including an installment agreement) that allows you to pay off any outstanding balance over time. Once your online application is complete, you'll receive an immediate notification of whether your payment plan has been approved without having to call or write to the IRS. Online payment plans are processed more quickly than requests submitted with electronically filed tax returns, even if the new tax is not yet assessed."
The IRS now offers both short-term payment plans and long-term payment plans.
The short-term is for 120 days or less and the total amount owed is less than $100,000 in combined tax, penalties and interest; while the long-term plan is for longer than 120 days, and is paid in monthly payments, and the amount owed is less than $50,000 in combined tax, penalties and interest. If the IRS approves your long-term payment plan – the installment agreement – a setup fee may apply depending on your income. The IRS will generally give you up to seventy-two months to pay your bill.
Moreover, if you already have a payment plan, you may even qualify to use the online payment plan option to revise your existing agreement.
The biggest downside to a payment plan is that if you continue to fall behind, the IRS can file a federal tax lien against you and your property, which can then make it challenging to obtain a loan. Additionally, for those who are self-employed you need to continue to make quarterly tax payments or else you can continue to fall behind.
Then there is the issue that you are simply unable to pay the IRS the full amount owed. If your business has failed or you've fallen on hard times, you can request an offer in compromise.
This allows you to settle your tax debt for less than the full amount you owe. According to the IRS, this is a legitimate option if you can't pay your full tax liability, or doing so creates a financial hardship. The IRS will consider your ability to pay, income, expenses and asset equity.
Peter Suciu is a Michigan-based writer who has contributed to more than four dozen magazines, newspapers and websites. He regularly writes about military small arms, and is the author of several books on military headgear including A Gallery of Military Headdress, which is available on Amazon.com.