It’s tough finding out that you owe money to the IRS. But the key to tackling this crisis is not to get hysterical! Analyze your situation with a calm and rational mind so that you can plot your next course of action. Taxes have indeed made people’s lives miserable. Many have had to resort to side gigs to make ends meet, and sometimes this can result in a higher tax bill. Even people who have no job at all have become victims. Though unemployment benefits are supposed to be their main source of survival, it turns out that they are taxable. And with all the post-pandemic financial chaos, it’s expected that this tax season is going to be a hot one. We’re going to show you a couple of ways on how you can survive the tax fiesta and still make it on top. But whatever you do, don’t commit these four deadly tax sins.
Tax Sin #1: Hiring Someone to Do Tax Negotiations
You should not hire any individual or organization to negotiate on your behalf with the IRS. This should only be done if you are in some serious trouble with the tax authorities and need professional representation. In that case, you should seek the assistance of a tax consultant, a CPA, or a lawyer.
Nonetheless, in most situations, you’re the best person to negotiate with the IRS. You don’t need help getting any type of representation in front of the IRS or in negotiating a payment plan. Companies that claim that they can negotiate with the IRS and get people out of debt, end up putting people in more debt because of the fees they charge.
Tax Sin #2: Not Filing Because Your Tax Bill is Not Affordable
If there’s anything you’ll regret more, it’s not filing your taxes. The punishment will take a tough toll on your finances. First, you will be required to pay a late fee at a monthly rate of 5%, until you have paid 25% of the tax bill. If you file your returns punctually but haven’t paid, then your late fee would 0.5% per month to reach 25% of the tax bill. In both cases, you would be charged these expenses with interest. There’s always the option of requesting a tax extension, but note that it gives you additional time for filing the returns rather than getting the money together to pay the taxes.
Tax Sin #3: Paying Your Taxes Using Your Credit Cards
This is not a smart thing to do. Do not under any circumstances use your credit card or cash advance to settle your tax bill. Credit cards have an APR of 16% and cash advance can have an APR of a jaw-dropping 25%. Other fees may be involved as well.
The best thing you can do is set up an IRS payment plan, which may involve interest and penalties. You shouldn’t let this scare you because the monthly rates of the late fees drop from 0.5% to 0.25% and when you add interest into the equation it’ll be around 6% annually. If your bill is less than $10,000, the IRS is usually flexible about agreeing to a payment plan which would involve a payback time of around three years with no installments. Hopefully, that’s more than enough time to get the money together.
Tax Sin #4: Using Your 401(k) to Pay Your Taxes
Don’t ever sacrifice any of your retirement money to pay your taxes. It’s your safety cushion so that when you retire you don’t have to spend a single day working when you’re elderly. You should only do this if you have to. Some experts say that if you withdraw your 401(k), you could potentially be adding more taxes on yourself just to pay your taxes. It’s more advisable to use a Roth IRA if you have one.