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What to do if the IRS sends you a tax bill instead of a refund

Some filers “may be in for sticker shock.”

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2020 was a complicated year — and filing taxes for it is proving to be equally complicated.

Millions of people who lost jobs last year may not have realized their unemployment income is taxable at the federal level, and often at the state level. The American Rescue Plan waives federal tax on the first $10,200 in unemployment income received in 2020, and some states have followed suit. Still, if someone didn't withhold taxes on that income, that could affect their tax bill. And anyone who traded stocks, invested in cryptocurrency, or started a side gig to supplement their income could also face an unexpected bill.

As a result of all the moving parts, nearly a third, 32%, of U.S. taxpayers still don't know whether they're getting a refund or owe money, according to a March poll of 1,076 adults by NORC at the University of Chicago.

The IRS has already processed 105 million individual tax returns so far this year, providing filers with an average refund of $2,870. But some could be getting an unexpected bill instead.

Here's what to do if you get a tax bill instead of a refund, and some steps to pay back the money you owe.

Remember that IRS payment plans are an option

Failing to pay a bill from the IRS can cost you more money in interest and penalties, and even damage your credit score down the line. But if you're not able to immediately pay what you owe — perhaps because your finances were hurt by Covid — the IRS offers a variety of payment plans to help you get back into the black.

The agency's short-term payment plan lets you make monthly payments to chip away at the debt, as long as you can pay in full within 120 days. There's no setup fee for this plan, but interest and penalties will still accrue until the total is paid.

Filers with bigger bills should look toward the long-term payment plan, which offers more time to pay. Some additional application fees apply with this method, however, as do accrued interest and penalties.

In certain scenarios, taxpayers could also be eligible for an offer in compromise. This allows you to pay less than you owe, if paying in full would cause serious financial hardship. But this option isn't for everyone, the IRS notes, and there could be further costs down the line. For example, you may not get a refund next year.

How to find out if you owe the IRS or will get a refund

To get more details on your tax situation, and to find out in advance what to expect, take a look at the tax withholding estimator on the IRS' website. Filers can input some basic information, including what they expect to earn and any deductions or credits they may qualify for, and receive an estimate of their refund or the amount they owe.

Be sure to double-check any income documents you get from work, like 1099 forms, W-2s, and pay stubs, to compare those numbers to what the IRS has on file.

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For those depending on a refund, knowing upfront what you're likely to get back can help with financial planning, says Zachary A. Bachner, a CFP with Summit Financial Consulting. "Some individuals see a refund as a year-end bonus that is calculated into their budget. This money could be used to pay bills, debt, etc., that are needed ASAP."

If you haven't filed yet, do it ASAP

If you know that you owe the IRS, or think you may, file your taxes sooner rather than later. The earlier you find out the amount you owe, the more time you'll have to make a plan to address it.

"I recommend most people file their taxes as soon as they get their documents, such as W-2s," says Carter Seuthe, vice president of content at Credit Summit. "So long as you have everything you need, there's usually no downside to filing early. You'll have the most accurate account of your tax year, and you'll give yourself plenty of time to pay any taxes due."

Plus, if you're due a refund, you'll see that money sooner. The IRS anticipates that 9 out of 10 taxpayers will receive their payments within 21 days of filing, as long as they opt for direct deposit. (Be aware that some people have reported 6 to 8 week waits for refunds this year, due to pandemic-related delays.)

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Since the IRS delayed the tax deadline to May 17, taxpayers have more time to get their documents in order. If you still don't think you'll be able to file by then, you can apply for an extension, which gives you until October 15. Just know that an extension to file is generally not an extension to pay, and you will still be on the hook to address your bill this month.

Even if you can't pay the bill, filing for an extension is a much smarter move than not filing at all. If you don't file, you could be subject to the IRS' failure-to-file penalty, which could cost 5% of your unpaid tax bill for each month or part of a month it's late. If you file but don't pay, the agency enforces a 0.5% failure-to-pay penalty on what you owe each month or part of a month until you pay in full.

Talk to a professional if your situation is complicated

A call to the IRS may not help you figure out your tax situation. The agency got 7.5 million more calls in January than the year before, an increase in demand of more than 300%, an agency spokesperson told Politico. Only about 1 of every 11 calls were being answered.

The agency is still dealing with a backlog of 2019 returns and staffing setbacks from the pandemic. Changes to the tax code as a result of the American Rescue Plan also complicated the process.

If you call the IRS, "you are not going to get through or you are going to be on hold forever," Timothy Gagnon, an associate professor of accounting at Northeastern University, told Grow recently. The agency is "getting thousands of calls a day. It's a very hard time to get an answer."

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As an alternative to calling, try using the IRS' online tools, which can help you troubleshoot common issues like investigating the whereabouts of a missing stimulus check, obtaining your records from previous tax years, or signing up for a payment plan.

If that still doesn't resolve your issue, consider getting some outside help.

"Asking a tax preparer or tax attorney, utilizing help from your tax software provider, and talking with a family member or friend about your questions" are all good options, Mark Jaeger, vice president of tax development at TaxAct, recently told Grow.

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