Let’s face it; no one likes receiving a notice in the mail that you owe the IRS money on an outstanding tax bill. It is scary, especially if you aren’t sure how to proceed.
The last thing you want is for the IRS to garnish your wages or take your house to cover your debt. So how long do you have to pay taxes? Continue reading below to learn more about why you may owe taxes, when you have to pay them, and who you can reach out to help you with your specific tax situation.
Common Reasons Why You Might Owe Taxes
There are many different reasons why you may taxes. One of the most common reasons is simply just not withholding enough from your paycheck. For example, you may owe taxes if you changed jobs and withheld too little from your paycheck. When you start a new job, your job typically requires you to fill out a Form W4, which determines how much your employer should take out for taxes.
Tax Shock Events
If you are a sole proprietor or someone who is self-employed, you may experience a “tax shock event.” A tax shock event happens when you don’t pay your estimated taxes.
These estimated taxes are used to pay income, Medicare, and Social Security taxes. When you work under an employer, they automatically withhold your taxes.
Child Tax Credit
Payments received in 2021 for the Child Tax Credit could also be the culprit for you owing taxes on your return. If the money you received was more than you should’ve expected payment for, you most likely need to pay that back.
Are you a parent who shares custody of your children? If so, this too could have an impact on your taxes. For example, if it was not your year to claim the child as your dependent, but you received the payment from the child tax credit, you will have to repay that back.
Higher Income Than Usual
The more you make in America, the more you have to pay taxes. If you earn a higher income than usual, whether through overtime or earning a raise, it could bump you into a higher tax bracket.
Failure to File
If you fail to file your tax return on time, you could face additional fines and fees that add to your tax bill. The annual due date to file your federal taxes is April 15. In 2021, there was an exception.
You had until May 17 to file your federal tax return. Although the federal tax return deadline date changed in 2021, the state deadline did not change. So, if you failed to file or filed late, that could be why you owe money to the IRS.
Changes in Tax Codes
It isn’t uncommon for the IRS to change the tax codes at least once every few years. With recently new tax laws in place, there is a chance that you could owe money, even if you expected to receive a return. When the IRS updated its tax brackets, it could have also put you in a new tax category.
Changes in Deductions
Similar to the child tax credit- if you claimed any deductions that you didn’t qualify for, you need to pay those back. For example, the earned income tax credit comes with annual limits. So, if you made more than the previous year, you might not be eligible.
If you invested in cryptocurrency and received a high investment return, there is a good chance you could owe money to the Internal Revenue System. You should report significant gains from cryptocurrency on your taxes, but only if you sell crypto.
If you bought cryptocurrency but did not do anything with it, you won’t have to report anything. Once you sell the crypto and take that payment, you realize a gain. At that point, you must report your activity and pay taxes on any capital gains.
Significant life changes can affect your filing status, such as having a baby, getting married, retiring, or going through a divorce. Filing status changes can also result in changes in available credits and deductions. For example, going from Head of Household to Single will affect your deductions and tax bracket.
Due to the effects of the coronavirus pandemic, many Americans claimed unemployment benefits. If this was your first time claiming the credit, you might not realize that the income received from unemployment is taxable at the federal level. You may also need to pay taxes at a state level, depending on the state you reside in.
What Happens if I Can’t Pay IRS Taxes?
If you find yourself in a challenging financial situation where you can’t pay IRS bill, make sure that you file your taxes anyway or create a way to pay what you owe in taxes. If you fail to file your taxes or if you fail to pay your taxes, the government has the right to seize your assets. In the most extreme situations, you can possibly face jail time.
Filing Your Taxes Late
If you know that you will be late filing your taxes, you may want to reach out to the IRS as soon as you can. You can file an extension by submitting Form 4868 to the IRS. This extension allows you more time to file your return, but you must send it to the IRS at least by the fifteenth of April.
It is crucial to note that this form only gives you additional time to file your return and no extra time to pay your tax liability. If you file your return late or fail to file altogether, you will be subject to penalties and fines. These charges accrue at a rate of 5% of the unpaid taxes for each month or part of those months where the tax return is late.
These charges do max out after a certain point of time. After five months, the failure to file a penalty is 25% instead of 5%.
Paying Your Taxes Late
If you fail to pay your taxes by the due date, you risk accruing penalties and interest on the outstanding amount you owe. Regardless if you filed an extension, you could face the failure to pay the tax rate plus 3%.
The failure to pay penalty charge starts at a rate of 0.5% of your outstanding bill for every month you don’t pay the debt. You will face both penalty rates if you fail to file and pay your debts. The maximum penalty for not filing and not paying your taxes is 47.5% of your tax liability.
Notice of Federal Tax Lien
If you fail to reach out to the IRS about your situation and you ignore any letters in the mail that demand your payment, the IRS may file a Notice of Federal Tax Lien. This tax lien lets creditors know that they have the right to your personal assets, real estate, or other assets to pay off the debt you owe.
If you continue to ignore their notices, the Internal Revenue System may issue a levy. An IRS levy initiates the seizure of your property to pay off what you owe. The Notice of Federal Tax Lien is a warning, whereas the levy is the IRS taking action.
These levies can show up in several different ways. For example, the government has the right to garnish your wages through your employer, or they can directly seize your assets from your bank account. If you have any houses or vehicles in your name, the IRS has the right to seize them and sell them.
How Long Do You Have to Pay Taxes?
Generally, you have up to 120 days after the filing deadline to pay off any debts you owe. Of course, not everyone has that type of money on hand to take care of those debts within a short amount of time. Fortunately, there are several different ways to pay off what you owe.
Electronic Federal Tax Payment System
The EFTPS, or electronic federal tax payment system for long, is a web service operated by the United States Treasury Department. If you want to make online payments, you can use the EFTPS.
To use this service, you must set up a profile with your bank information. Once you are set up on the website, you can make payments for several different tax obligations.
Various tax obligations you can pay via EFTPS:
- Estimated taxes
- Extension payments
- Tax balances for previous years
If you would like to, you have the option to schedule advance payments. This allows the government to take money out from your account at a predetermined date. Advance payments are best for those who want the money withdrawn without worrying about missing a payment date.
U.S. Postal Service
Although not necessarily recommended, you can send your money to the IRS the old-fashioned way. The IRS has several different addresses you can send the payment, so make sure you send it to the right address.
IRS Direct Pay
IRS direct pay is very similar to the Electronic Federal Tax Payment System in how they work. You can use both portals to pay for your tax obligations, but with the IRS direct pay, you will have to input your information whenever you want to make a payment. You have the option to schedule advance payments, and if you need to cancel the payment, you can do so two business days before the date of withdrawal.
Set up a Payment Plan
As mentioned earlier, not everyone can pay off their tax obligations within the 120 days allotted by the IRS. To help with this problem, the IRS offers the option to set up a payment plan. You have the opportunity to set up a monthly installment plan that allows you to pay off the debt within 72 months.
Your best option when setting up a payment plan with the IRS or State is to get a tax professional to do it for you. To set up the plan on your own, you will need to pay a setup fee of $130. If you agree to have the monthly payments taken from your bank account, the setup fee drops to $31. Those who qualify as low-income only have to pay $43 for the setup fee.
It is important to note that if your tax liability is over $25,000, you must opt for the direct debit option. For the long-term repayment option of 72 months, your debt cannot exceed $50,000.
Should I Reach Out to a Tax Professional?
It is always a good idea to reach out to a tax professional such as a CPA or a tax attorney to help take a look at your case. Dealing with the Internal Revenue System on your own can be scary, especially if you’ve received a notice that they want to garnish your wages or take possession of your assets.
Get the Tax Help You Deserve
Now that you know how long you have to pay taxes, it’s time to create the best strategy for you. Fortunately, if you aren’t able to pay your taxes within the allotted 120 days provided by the IRS, you have the option to set up a payment plan.
If you have a more complicated tax situation, you should reach out to a reputable tax professional to help negotiate the best deal for you. Contact us if you are ready to learn more about your available options and want to work with a team of reputable tax professionals.