IRS Payment Plans and Current Year Refunds

IRS Payment Plans and Current Year Refunds

How Will Your Refund This Year Affect Your Payment Plan for Prior Years?

It can happen pretty easily.  You make more one year than you did the previous year, but don’t adjust your withholding.  Or, you claimed more deductions on your W-4 than you ended up claiming on your tax return.  In any case, you owed money to the IRS that you couldn’t pay.  So, you set up a payment plan.  But what happens if you get a refund for this year?

You Owe, You Owe, So Off Your Refund Goes

That’s right.  Even if you’ve set up a payment plan with the IRS to pay down a previous years’ debt, the IRS will take any refund you receive for later years and apply them toward that debt.  The good news is that if you’re paying interest on that debt, this payment via your refund will lower the amount of interest you end up paying.  It will also reduce the amount of time you are paying on this debt because the principal amount is being reduced.

How Do I Avoid Using My Refund Toward Previous Tax Debt?

You can’t avoid the IRS taking your refund; however, you can avoid having a refund in the first place.  The key here is to reduce your tax liability instead of increasing your refund.  Take a close hard look at your Adjusted Gross Income, or AGI.  This is basically the total of all your income minus any deductions and credits.

At the beginning of the tax year, use a free calculator online to determine approximately what your tax liability will be at the end of the year.  Adjust your withholding from your paycheck accordingly using your W-4 form filed with your employer.   This way you’re not overpaying into the system causing a refund at the end of the year.  Take the additional money in your paycheck and have it automatically deposited into an interest-bearing savings account.  Not only will you now make money on those savings but you will have it immediately available to you in case of an emergency.  You could also take this extra money to pay down the principal balance on what you owe the IRS to avoid some of the interest charges.

You can also reduce your AGI by contributing to an IRA or 401k.  This money goes into that account tax free and builds interest for you over the years as you reach retirement.  Not only is this money reducing your AGI but it’s another way for you to save without giving your refund to the IRS.

Using an online tax preparation site will help you get the most deductions and credits when filing your taxes.  The system is designed to ask you questions about your income, family and expenses and may catch credits you wouldn’t have known you qualify for, thereby lowering your tax liability even further.

Keep Paying on Your Debt

No matter what you do, be sure to keep making those payments to the IRS.  If you don’t, things can get ugly fast.  The IRS can put a lien on your house and other property, garnish your wages or even haul you off to jail for not paying your taxes.  Communication is the key, so make sure if you anticipate any problems making your tax payments you contact the IRS before missing a payment.

Yes, the IRS will take your refund this year for prior-years’ tax debt.  The good news is you can avoid getting a refund at all by adjusting your withholding or you use that extra money to pay down your debt to the IRS.

Prior Year Tax Preparation Online

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