When it comes to tax debt, the Internal Revenue Service (IRS) watches Americans like a hawk. It is, therefore, in taxpayers' best interest to remain vigilant over their expenses and diligent about their tax bills. The pivotal date of April 15th should consistently remain on the forefront of consumers' minds, and they should apply concerted efforts towards keeping track of their finances throughout the year. There are numerous effective methods for individuals and businesses to avoid IRS tax debt, and they include the following:
1. Meeting tax deadlines
The surefire way for a consumer to avoid tax debt is to file the personal tax return and pay his or her taxes in a timely fashion. If unable to pay the full tax amount by the deadline, taxpayers should strive to pay as much as possible, since the larger the payment, the lower the penalty. By filing on time, individuals will not incur an IRS penalty, which ranges from 5% to a maximum of 25% of the balance due. To prevent their debt from mounting, taxpayers who submit their payments late or fall behind should pay the penalty and their tax bills as quickly as possible.
2. Extension of the payment period
Depending on the particular circumstances of their case, taxpayers may be eligible for an extension of the time to pay. They can petition, in advance of the April 15th filing date, for an extension ranging from 30 to 120 days. If they are still unable to pay the entire amount as the extension deadline draws nearer, taxpayers should fork over as much of the tax balance as they are able to.
3. Selling assets and gathering the necessary funds to pay off the loan
To pay off their IRS debt, taxpayers should contemplate one of the following efficacious actions:
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Selling off some of their assets or an investment
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Obtaining a personal loan from friends or relatives
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Taking out a bank loan or a payday advance on a credit card
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Borrowing against their life insurance or 401(k)
4. Regularly keeping track of their income
5. Saving receipts to support their deductions
6. Establishing a tax calendar to remind them of the date for filing their tax returns and making their payments (an especially useful tool for individuals and businesses filing quarterly estimates)
7. Withholding enough money from their paychecks
For satisfaction of their tax bills, taxpayers should withhold sufficient moneys from their paychecks, set aside a good portion of those funds and/or reserve enough cash in a liquid account.
8. Paying with a credit card
To pay off a portion or all of their IRS tax debt, consumers may utilize their credit cards. Currently, the IRS has contracts with two companies for the handling of credit card charges. The contractors are (1) Link2Gov and (2) Official Payments. Both businesses accept payments from paper and electronic filers, either via the internet or telephone. They accept VISA, MasterCard, Discover and American Express.
9. Relying on tax services
Professional tax services can provide substantial and beneficial guidance to taxpayers in many respects. First, they can analyze their tax situation and determine which of the tax rates is applicable to their clients. Secondly, they can establish how much their clients owe in taxes, accumulated interest and penalties. Thirdly, they can instruct their clients on the optimal approach for reducing, eliminating, managing, and avoiding tax debt.
10. Setting up an installment agreement
Taxpayers witnessing an increase in their tax debts or anticipating a potential difficulty in meeting their tax obligations should, upon filing their taxes, negotiate an installment agreement with the IRS. They stand a very good chance that the IRS will grant them the opportunity to pay their outstanding tax balance in monthly installments by way of an installment agreement.