How to Handle a Big – and Unexpected – Tax Bill

It happens more often than we’d like to think. You misjudged or miscalculated your tax liability for the year, and, surprise, you owe Uncle Sam big bucks.

It’s not a good feeling. And those threatening letters from the IRS that will certainly follow if you don’t pay promptly will cause sleepless nights.

Uh Oh!

The key is to not panic, don’t ignore the problem and then take steps to ensure that you don’t get into that situation again.

Figure out what happened and make sure you aren’t surprised next year.

“Go back in time and pay close attention to what’s happening throughout the year,” says Jennifer Belmont Jennings, attorney and Certified Financial Planner at MGD Law in St. Louis, Missouri.  “Pay attention to your investments during the year, in your taxable accounts. Is your advisor selling stuff? Could you have gains? Are you receiving stock at work that you’re going to have income tax due?”

Work with a tax advisor to help predict tax problems so you can better estimate know what the tax bill is going to be. “The best thing to do is to put in the work on the front end to avoid surprises,” she says. “But we know that those surprises happen, or sometimes things might happen toward the end of the year, and you don’t have a lot of time to adjust your withholding.”

Mark Jaeger, vice president of tax operations for Drake Software and TaxAct, says he recommends that people, especially new retirees, do a prior year comparison either with your tax advisor or with tax software. “if you see something that doesn’t look right, it gives you a heads up,” he says.

Even if you can’t pay the tax bill, you still need to file your taxes.

Next comes a plan for payment, says Jaeger. “Am I able to make the payment, or not able to make the payment?”

Belmont Jennings says you still need to file your taxes on time. “Pay as much as you can when you file your taxes,” she says. “It is a crime not to file taxes. So, you will be in much more trouble if you don’t file, and you try to avoid the problem.”

But keep in mind that the payment isn’t due until April 15, says Jaeger. “Even though you filed your return on February 28, you don’t have to worry about making that payment until April 15, generally speaking.  So, if you can make that payment by April 15, everything’s great.”

If you can’t make the payment, he says, then it becomes ‘when do we think we can make the payment, and what type of assistance you need in order to make the payment.’

There are options if you need help paying the tax bill, but not all are good options.

Ideally, you would have the funds to pay the bill from your emergency savings or other investments. The IRS does not accept credit card payments, but there are third-party sites that will accept credit cards, and will in turn, pay the tax bill for you, says Belmont Jennings.

You could put it on a credit card, but interest can be “terrible” on credit cards, she says. She is not a fan of borrowing from your 401(k), because you would be required to repay the loan if you leave your job, making you subject to taxes on the withdrawals and possibly penalties as well. “So, you could still be in a worse position than you would have been had you just worked out a plan with the IRS,” she says.

If you don’t have a way to pay, contact the IRS and work out a payment plan.

You can contact the IRS to try to work out a payment plan. “Those plans will depend on how large the bill is,” says Belmont Jennings. “You will have to pay interest and you should expect to pay penalties, because if you don’t pay all of the tax due at the time it’s owed, they’re going to charge you a penalty. But it’s still better to try to work with them on a payment plan than it is to ignore the situation.”

Tax-relief companies may offer assistance, but make sure they are legitimate.

“There are tax relief services that are out there,” she says. “I would not be able to endorse one. If you are in a really serious situation, we’re not talking and surprised that I owe $20,000 or $30,000, but you’re in a really serious situation, I think there are there are tax relief companies that are out there that you certainly can look into. But you have to be aware. Some of them are scams that some are going to make claims that aren’t accurate, and they’re going to charge high fees.”

Check them out

Do your due diligence and research on those companies, she says. Check with the Better Business Bureau, check and see if complaints have been filed with the Attorney General’s Office where their headquarters are located.  Also, look for ratings and reviews and make sure that the company that you are calling really is reputable,” she says.

When you don’t have the money…

…contact the IRS and work out a payment plan.

Contact the IRS to try to work out a payment plan. “Those plans will depend on how large the bill is,” says Belmont Jennings. “Because if you don’t pay all of the tax due at the time it’s owed, they’re going to charge you a penalty. But it’s still better to try to work with them on a payment plan than it is to ignore the situation.”

Payment Options

The IRS options, called an installment agreement plan, offer a short-term repayment plan and a long-term plan, says Jaeger. The short-term payment plan is free, providing that you pay off the bill in 180 days. There is, however, a cost if you pay over a longer term. “There are fees to get set up and then you’ll owe underpayment penalties, of which right now are 7% to 8% because interest rates are a little higher. But 7% is better than 28% on a credit card bill. So, it’s much better financially to try to get that set up with the IRS versus, letting it run on your credit card for 12 months.”

You might need legal help.

You are going you very likely need legal help if you got yourself in a situation with that huge of a tax bill,” says Belmont Jennings. “There’s something that’s not right, that you’re doing. And so, reaching out to a tax attorney is definitely a good idea.”

Did you know that Senior Planet has updated its options for charitable giving – which often has tax advantages?  You can now give gifts of stock,  or donate directly from your IRA.  Visit here for more information on all the options, plus instructions on how to give. 

Rodney A. Brooks is an award-winning journalist and author. The former Deputy Managing Editor/Money at USA TODAY, his retirement columns appear in U.S. News & World Report and Senior Planet.com. He has also written for National Geographic, The Washington Post and USA TODAY and has testified before the U.S. Senate Special Committee on Aging. His book, “The Rise & Fall of the Freedman’s Bank, And Its Lasting Socio-economic Impact on Black America” was released in 2024. He is also author of the book “Fixing the Racial Wealth Gap.” His website is www.rodneyabrooks.com

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