Tax debt is a burden that only increases with time. And the pace at which it increases depends upon various factors, including the amount of tax debt you owe. To keep your tax debt from increasing, you can use various methods apart from considering paying the tax debt in full.
Often, taxpayers postpone payment of tax debt because they are unaware of IRS penalties and interest, or because they do not have the financial capability of paying their entire tax debt. Whatever the reason, postponing paying your tax debt will cause the amount you owe to increase.
The IRS penalties begin with 0.5 percent and can reach up to 25 percent. Over time, penalties and interest accumulated monthly substantially increase the total tax debt to be paid. To avoid paying more in taxes, seek resolution under a payment plan. The IRS has tax debt reduction plans and also postponement of payment program Currently Not Collectible that allows tax debt resolution for taxpayers with limited or no ability to pay respectively.
Pay Tax Debt using a Loan
It is beneficial to pay your tax debt in a lump sum because you pay the least in penalty and interest if you do. The IRS charges penalty and interest each month on unpaid taxes. If the interest on loan is lower than the penalties and interest the IRS charges, then you should consider using a loan to pay the full tax debt. It will help you to save much in tax debt.
Pay Maximum Amount in Initial Payments
If you have the capability to resolve your tax debt, but you want to pay it in installments, you must pay the maximum amount that you can in the first installment. This will lower your total tax debt, automatically lowering the amount of penalties and interest charged. To pay your tax debt in installments, you will need to qualify for an Installment Agreement.
Pay your Tax Debt Early
It is beneficial to pay your tax debt as early as possible. If you pay your tax debt within one month of incurring it, you will only need to pay penalty and interest for one month. The longer you take to resolve your tax debt, the more you will need to pay, irrespective of the amount of tax debt owed. Therefore, whenever you come to know that you owe back taxes to the IRS, begin making efforts to resolve the tax debt. Even if you cannot pay your entire back taxes amount, you can still resolve your tax debt using an IRS payment plan.
Instead of allowing your tax debt to increase, make effort to resolve it permanently. Non-payment of tax debt will ultimately lead to the IRS to begin collection actions, which can be avoided by timely resolution.