You’ve probably seen the late-night ads promising to reduce tax debt.
Even though a majority of Americans can look forward to getting a tax refund each year, about a third of the country will owe money to Uncle Sam.
If you or people you know are among them, the worst move you make is to do nothing. The second-worst thing would be to follow the advice of those ads.
As of Feb. 27, the average refund was $3,742, an increase of 10.6 percent compared to the same period last year, partly due to tax changes under the One Big Beautiful Bill Act.
According to the National Taxpayer Advocate’s most recent annual report, about 63 percent of individual taxpayers received a refund last year. Yet, knowing that two-thirds of the country is getting a windfall doesn’t make it easier when you’re the one who has to write a check.
Many people believe that if they can’t pay, they shouldn’t file. However, the IRS code punishes silence far more harshly than it penalizes a lack of cash. In 2024, the agency assessed nearly $18 billion in additional taxes on returns filed late.
Whether you’re curious about the legitimacy of those tax relief commercials that become ubiquitous this time of year or you’re the one facing a tax bill, here’s what people should do if they owe the IRS.
Skip the debt relief middleman
Most of those late-night TV and radio ads offer “expert” tax relief that you could actually handle yourself for free. Worse yet, many of these commercials are fronting for predatory companies that will charge thousands of dollars that could go toward paying your tax debt.
Even when these companies are legitimate and not a scam, the help they provide is typically available by calling the IRS or visiting IRS.gov.
For example, the debt settlement company will send you paperwork to set up a payment plan with the IRS. But it’s likely information downloaded from the IRS website.
File on time even if you’re broke
I can’t stress this enough. Even if you can’t send any money, submit your return by the April 15 deadline. If you need more time to gather your paperwork, request an extension. Just remember: an extension to file isn’t an extension to pay.
The failure-to-file penalty can really sting. If you owe money and fail to file, the “failure-to-file” penalty is 10 times higher than the “failure-to-pay” penalty.
If you file your return on time but don’t pay, the penalty is 0.5 percent of the unpaid taxes for each month or part of a month the taxes remain unpaid. The IRS limits this penalty to 25 percent of your unpaid taxes.
If you file late without obtaining an extension, the failure-to-file penalty is typically 5 percent for each month or part of a month that a return is late, up to 25 percent.
Two years ago, my son learned this the hard way. He thought he had filed using online software, but a technical glitch prevented the IRS from receiving it. By the time he realized the error, the “failure-to-file” penalty had grown to three times his original bill. Due to the late filing, late payment, and interest, he ended up paying nearly $500, more than the actual tax he owed.
Pay what you can
Your tax debt isn’t an all-or-nothing situation. If you owe $5,000 but only have $500, send the $500.
Every dollar you pay now reduces the interest and penalties that accumulate.
Set up an installment agreement
If your total owed in income tax, penalties and interest is $50,000 or less, you can apply for a long-term payment plan. Paying over time is much better than the collection tools the IRS has, such as seizing bank accounts, garnishing wages or placing a lien on your property.
If you’re struggling, you might qualify for an “Offer in Compromise,” or OIC. This program is intended to help people who are so financially strapped that it’s unlikely the agency could collect all that the government is owed. However, the acceptance rate is low because you must prove that paying the full amount would cause an unfair financial hardship, but it’s a route worth considering before losing hope.
In fiscal year 2024, the IRS accepted 7,199 settlement offers out of more than 33,591 applications. That is a success rate of just 21 percent, a far cry from what the commercials suggest.
When you hear those tax relief commercials promising to settle tax debt for less than you owe, they are usually talking about an Offer in Compromise. But don’t be fooled. The IRS has flagged these “OIC mills” as one of this year’s top tax scams that “often overpromise results and charge high fees to taxpayers who don’t qualify,” according to the agency.
Use the “Offer in Compromise Pre-Qualifier” tool on the IRS website before paying a tax relief company to do it for you.
Avoid using your credit card to pay the debt
If you owe the IRS and cannot pay by the April deadline, you will be hit with a combination of interest and penalties. So, it’s tempting to use your credit card and deal with it later. But if the interest rate on your card is high, you’re just shifting the problem to a higher-cost solution.
For April 1 through June of this year, the interest rate on unpaid individual taxes is 6 percent. The average credit card interest rate is just below 20 percent, according to Bankrate.
Request ‘currently not collectible’ status
If paying even a small amount would prevent you from covering basic living expenses (rent, food, utilities), call the IRS and ask to be placed in “Currently Not Collectible” status. They will pause collection efforts, though interest and penalties will continue to grow.
If you owe this year, don’t panic or hide. Be your own savior: file the return, pay what you can, and contact the IRS to make a plan for the rest.
The post A guide to surviving tax season when you owe the government appeared first on Washington Post.
