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What If I Cant Pay My Taxes Fully
Oftentimes, people end up with back taxes because they cant afford to pay the tax bill on time, and so instead of filing and paying part of it, they simply ignore it completely.
However, the IRS recommend avoiding this problem , by requesting an extra 60-120 days for repayment.
If youve ever heard of filing for a tax extension, this is essentially all that is and whether you request one because you couldnt get everything filled out in time, or because you didnt have the money, doesnt matter youll get the extension as long as you request one in time.
To request an extension for you taxes, contact the IRS directly by calling 1-800-829-1040, or use their Online Payment Agreement application.
Two other ways to lesson the tax blow and get some time to save up the cash for your tax bill are to request an installment agreement , or file for an Offer in Compromise .
No matter how much you owe, or how late you think youre going to be, its much better to proactively file for one of these extensions or debt reduction programs than it is to simply ignore your tax bill.
The IRS is typically pretty good about working with people who are willing to admit that they have a problem, and seek a resolution. But for those who try to skip filing and paying altogether, things dont often go down so painlessly.
Gas Mileage And Vehicle Expenses
You can claim a deduction on your gas and vehicle expenses from your taxes if you use your vehicle for work purposes. Regular W-2 employees are unable to deduct their commute from their taxes, no one can deduct their commutes.
This can be done in two different ways: the standard milage rate or actual expenses.
Using the Standard Rate
In the standard rate method, you will first need to figure out how many miles youâve driven for business purposes throughout the year. Then, multiply that number by the standard mileage rate given by the Internal Revenue Service . This is how you claim mileage for taxes to lower your tax liability.
Example: You drove 10,000 miles in a year for business. The 2021 standard mileage rate is 56 cents per mile. The equation would be: 10,000 miles x .56 = $5600 total tax deduction.
Tracking Actual Expenses
You can also choose to write off your actual business vehicle expenses. Rather than using the IRS standard mileage rate, you will record all the expenses you had throughout the year.
If you had a pricey vehicle repair and know your actual expenses will be high, you may want to opt for the actual expenses method, as youâll receive a larger tax break.
These types of expenses usually consist of:
- Gas Cost
- Vehicle Registration
- Vehicle Maintenance and Repairs
Example: You drove 5,000 miles in a year for business but drove a total of 25,000 miles. Divide 5,000 by 25,000 to get the percentage you drove for business .
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Record All Business Deductions
The more you track and the more organized you are, the better youâll be during tax season. Remember, you are responsible for paying “both sides” of the self-employment tax. When you know your expenses and accurately track them, you will understand what tax deductions you can get and can maximize them.
Note: Itâs critical to separate business expenses from personal ones, as you donât want to merge the two accidentally. If you want to do all of that automatically, try Bonsai’s freelancer 1099 expense tracking software. Our tax software can help you organize all of your expenses and save you money on your tax bill at the push of a button.
What Are Estimated Taxes
Estimated taxes are quarterly payments that cover your income tax, self-employment tax, and alternative minimum tax. Self-employed individuals, sole proprietors, partners, and S-corporation business owners pay these each quarter to prevent being charged a penalty by the IRS.
Non-self-employed individuals may also pay estimates if they’ve under-withheld or have significant other income.
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Find A Tax Relief Company That’s Best For You
We’ve weighed the pros and cons of some major players in the space.
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Anticipate Late Fees And Penalties
Unfortunately, the IRS is going to charge you interest and penalties on any amount you pay late. Like running a balance due on a credit card, these charges are going to make it harder to pay what you owe.
The more you’re able to pay on time, the less interest and penalties you’ll be assessed.
The IRS will eventually send you a bill, but you don’t have to wait to get the bill to make additional payments.
Pay what you can when you file your return, then send in whatever additional payment you can afford each payday using Form 1040-V.
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How Can You Prove An Oral Contract
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won’t stand up in court. Instead, it becomes a matter of “he-said-she-said” – which legal professionals definitely don’t have time for!
If you were to enter into a verbal contract, it’s recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it’s always best to gain the permission of the other involved parties before hitting record.
What Are The Benefits Of Paying My Taxes On Time
By law, the IRS may assess penalties to taxpayers for both failing to file a tax return and for failing to pay taxes they owe by the deadline.
If you’re not able to pay the tax you owe by your original filing due date, the balance is subject to interest and a monthly late payment penalty. There’s also a penalty for failure to file a tax return, so you should file timely even if you can’t pay your balance in full. It’s always in your best interest to pay in full as soon as you can to minimize the additional charges.
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Special 2021 Rules For Hurricane Ida Victims
The IRS announced on Aug. 31, 2021 that filing extensions have been provided for certain victims of Hurricane Ida. Residents of Louisiana have until Jan. 3, 2022 to file any returns or make estimated tax payments that would have been due on or after Aug. 26, 2021.
Some residents of New York and New Jersey have received the same extension. This extension applies to those who live in areas designated by the Federal Emergency Management Agency . You can search to see if your zip code qualifies at DisasterAssistance.gov.
Residents of all 82 Mississippi counties and the Mississippi Choctaw Indian Reservation have until Nov. 1, 2021 to file any returns or make any payments that were due beginning Aug. 28, 2021.
Other Options To Pay Your Taxes Over Time
The IRS charges set-up fees for those who need to pay their taxes over time. But there might be more affordable options, such as using a 0% APR credit card to pay your tax bill or even taking out a personal loan.
When comparing costs, look at how much the interest and fees will cost you over time. Both personal loans and credit cards charge interest, but if your is good enough to qualify you for low interest credit card, you should do the math to find out which payment option is cheaper. Add up the total interest, fees and penalties for all options based on how long you’ll need to pay off the balance. Then choose the one that costs the least over time and has a monthly payment you can afford.
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What Happens To Your Social Security If You Owe The Irs
IRS entitlement to your benefits is not automatic when you owe taxes, so you may not immediately notice a deduction for back tax debt when you start receiving benefit payments. Although your benefit eligibility is not affected by your tax debt, the IRS is allowed to take a percentage of your benefits through the Federal Payment Levy Program.
You Have Monthly Disposable Income
Its a lot easier to deal with back taxes if you have disposable income and you can make monthly payments. Generally, a payment plan is your best option if you can pay off the amount of taxes owed, plus penalties and interest before the statute of limitations expire in monthly payments. The IRS has a wide variety of different payment plans including the following:
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Should I Hire A Tax Relief Company
Tax relief companies typically offer to help taxpayers in distress. Some of them can be helpful if youre confused about the process or need help filling out forms. But remember:
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The IRS rejects most applications for offers in compromise.
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If a tax relief company loses or delays your application, youre still on the hook for your tax debt, interest and penalties with the IRS.
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You may have to pay an upfront fee to the tax relief company, and it may be a percentage of the tax you owe. That fee may be higher than what you end up saving on your tax bill if the IRS accepts your offer in compromise .
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Tread carefully, the Federal Trade Commission warns there are some bad actors out there. “The truth is that most taxpayers don’t qualify for the programs these fraudsters hawk, their companies don’t settle the tax debt, and in many cases don’t even send the necessary paperwork to the IRS requesting participation in the programs that were mentioned. Adding insult to injury, some of these companies don’t provide refunds, and leave people even further in debt,” it says.
Some tax relief companies will charge you a fee to determine how much you owe the IRS, set up a payment plan or see if you qualify for an offer in compromise. But these and other things you can do yourself for free:
Missing Out On Your Refund
Even if you dont owe taxes, late tax returns come with penalties. In fact, according to the refund statute of limitations, you must file your tax return within three years of the due date to receive a refund for the IRS for a given tax year. After this time expires, the IRS will neither send you a refund for the tax year nor apply any credits for that tax year to other tax years that are underpaid.
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Contact A Tax Professional Today To Avoid Paying Your Independent Contractor Taxes
Completing your yearly taxes can be frustrating and a little scary, but it doesnât have to be. If you take the time to examine your possible deductions, keep track of your expenses and business income in detail, and remember to take a deep breath, youâll be just fine.
If you donât trust yourself, the best thing to do is to ask the experts and turn to a tax-focused program for assistance with your taxes. With professional help, youâll improve your chances of lowering what you owe and avoiding an audit by the IRS during tax time.
Are you ready to stop stressing about your freelance or independent contractor finances? With its seamless, integrated, and automated tax software, Bonsai could be the solution youâve been searching for. From expense tracking and income reporting to estimated tax planning and much more, taxes will be a breeze!
Start using our accounting software for freelancers for free today and enjoy peace of mind when tax season rolls around. Our app sends you filing deadline reminders, estimate taxes and discovers tax write-offs automatically so you can avoid paying taxes. Try a 14 day free trial today.
Paying Debts And Collecting Tax Refunds
Paying any tax due on each completed return is relatively simple. The IRS wants your money, so it doesnt make the process challenging. You can go to its Direct Pay website to pay by electronic debit from your checking or savings account, and the IRS accepts credit card payments on its website, as well.
Keep in mind that there are time limits for refunds, audits, and debt collection. In most cases, your refund “expires three years from the date your tax return was due. But if you owe other tax debtsbecause you have a balance due from another year, for exampleyour refund will typically be applied to offset that debt.
Create a plan for paying off your tax debts if it turns out that you owe the IRS money. You might also want to plan on how to protect yourself from an IRS investigation, assessment, federal tax lien, or possibly a levy. You may have a few options, such as setting up an installment agreement with the IRS for a monthly payment plan or asking for an offer in compromise.
The IRS can and will impose penalties and interest on tax liabilities that aren’t paid in full by the deadline for the tax return.
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Irs Actions For Unpaid Back Taxes
Receive Assessment Letter and CP Notices
Once the IRS determines that you have back taxes, it enters you into the automated computerized notice cycle. These letters will let you know how much you owe, including additional penalties and interest. The first letter you will receive is an assessment letter that will state the amount of taxes you owe. This letter will then be followed by a series of CP notices. There are four of these letters you will receive from the IRS. These letters are a series of automated messages that the IRS sends to anyone who has unpaid back taxes. If you do not respond to these letters the IRS will begin taking collection actions against you. The letters start with CP-501 and go through CP-504. CP-501 starts off as an undemanding letter and goes to CP-504 which is very threatening and mentions their intent to levy.
Receive a Tax Levy
A tax levy is the actual seizing of assets that you own. This can be just about any asset that you own with a few exceptions. The IRS will continue to seize your assets until your tax liability is completely paid off or until you have arranged another agreement with them. Depending on what they are seizing, a levy can be called many different names.
Who Is Eligible For Irs Tax Debt Forgiveness Do I Qualify
It can be difficult to know if you qualify for debt forgiveness without sitting down with a tax expert. However, theres a very good chance that the IRS will be willing to make a deal with you if youve failed to pay your full tax bill due to a financial hardship. Here are the main factors the IRS looks for:
- A tax balance below $50,000
- An income cap of $100,000 for single filers
- An income cap of $200,000 for married couples filing jointly
- A drop in net income of 25 percent for self-employed individuals
Nearly everyone who applies will be approved for an IRS repayment agreement. However, repayment may not be the best option for you. You may actually be able to pay less overall with something like an Offer in Compromise or Currently Non Collectible status. Its important to note that both of these options require you to disclose financial information to the IRS. The last thing you want to do is present information that contradicts your claim that youre unable to pay your tax bill.
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Pay With A Credit Or Debit Card
You can also use a debit card to pay from your checking account or use a credit card to settle your bill. This is an option even if you dont have the funds available today. Since the IRS doesnt accept credit or debit payments directly, youll need to use one of the agencys approved third-party services.
While each service charges a flat fee for debit cards, they all charge a percentage for credit cards. Be sure to confirm the fee in advance so you know exactly how much youll need to pay. Since the IRS also limits the frequency of credit and debit card payments, confirm that you are eligible for this service before initiating a payment.
