For many college students, living with debt is just a fact of life. But when you owe money with your federal tax return, things can get serious fast. The tax return deadline this year is April 18, 2017, and you have until then to figure out how to pay what you owe. If you don’t satisfy the payment requirements, you could find your wages garnished.
But it doesn’t have to go that far if you take action. Here are some tax tips for what you can do when you owe Uncle Sam.
1. Take action
The most important thing you do is to file your tax return on time and send in as much of the income tax as you can. This year that means filing by April 18. Even if you owe taxes but don’t have the money, be sure to file your tax return by April 18. If you don’t file on time, then the IRS will add penalties to what you owe in taxes.
2. Ways to pay
I don’t usually suggest that college students use their credit cards to pay off other debts, but income tax debt is the exception. It might just be easier and quicker to pay your taxes with your credit card. The IRS is currently charging 4 percent interest on underpayments of taxes and I’m betting that your credit card charges a higher rate of interest so you have to consider this tactic carefully.
Would you get a better deal with a loan? Depends on who lends you the money. Check with your bank and with dear old mom and dad to see what kind of a deal you can negotiate.
3. Make a payment plan
If you just need a little more time, then the IRS may give you 120 days to come up with the money. Interest and penalties will continue to add up until you finally pay off the tax debt. To set up this arrangement, call the IRS toll-free at 1-800-829-1040.
Another way to pay your taxes is to ask for an Installment Agreement where you promise to pay a fixed monthly payment. There is a formal application process and fees will apply.
4. Desperate measures
If your situation is very serious, consider applying for an Offer in Compromise (OIC) where the IRS will accept less than you owe. For the IRS to consider an Offer in Compromise, you must submit an application, and must generally pay certain fees and a portion of the debt. You must then file tax returns and make payments on time for five years after the IRS accepts your offer.
The IRS may be willing to accept your Offer in Compromise if it determines that you don’t have enough assets to pay the debt in full and that it would create an economic hardship.
It takes time to negotiate an OIC so don’t delay. Be sure to keep all correspondence as you move through the process. Keep close track of the dates —if your offer is not rejected, returned, or withdrawn within two years of the date the IRS receives it, then the offer is deemed accepted.
5. When all else fails
What happens when you absolutely, positively cannot come up with the money to pay your taxes? If the IRS agrees that you can’t pay your taxes and also pay your reasonable living expenses, it may place your account in a status called Currently Not Collectible (CNC). The IRS will not seek to collect payment from you while your account is in CNC status, but the debt does not go away, and penalties and interest will continue to grow.
Let me repeat that. All that the CNC does is put off the inevitable day when you have to pay the taxes. Meanwhile you are being charged penalties and interest.
Owing income tax doesn’t mean that you’re a bad person. And it doesn’t mean that your life is over. But if you don’t take action to deal with the situation it will escalate to the point where you run out of options.