Keep Calm and Carry On: What to do if you get a big tax billCategories News & Updates
There’s no doubt about it: getting a big tax bill is one of the worst things ever, especially if you were hoping for a solid tax return to help boost your finances. Tax debt, if handled improperly, can be crippling. But, there’s no need to push the panic button yet as we’ve got some tips on how you can sort that big tax bill without incurring any fines or penalties.
First Things First
If you did your taxes on your own, your big tax bill might be an indication that you didn’t do them right. It’s not your fault – no one expects you to be a tax expert on top of being great at your job, being a good parent, or partner, or ambitious entrepreneur! So, if you expected to qualify for a deduction or credit, and your tax return doesn’t show it, make sure you’ve answered all the questions correctly. Taxes are complicated and it’s all too easy to get it wrong when you’re filing on your own. It’s easier than you might think to add the same income twice, or to forget an important deduction.
If your tax bill you’ve received seems out of tune with the information you have, it’s worth getting a professional to look over your file to see if they can remedy the situation. It’s been done countless times before, so don’t hesitate to get in touch if you think you may have messed up. A professional will be able to read your completed return carefully and look for errors.
Be sure to take a look at your tax return from the year before to determine if something is seriously amiss. If your tax situation hasn’t drastically changed but your tax bill has, then something’s up. The IRD doesn’t always get it right either – after all, they are human! Just because you receive a letter from them stating that you owe an astronomical amount doesn’t make it true. Call them up and ask questions – remember this is your money, so you’ve got to be proactive!
Penalties and Interest 101
Worst case scenario: you know you’re not going to be able to pay your big tax bill on time. So, what do you do? Knowing about the penalties and interest that may apply for failing to meet your tax obligations is a good place to start before you go making any decisions. For instance, you might think that you can get away with not paying that bill! Think again, friend. The IRD might be busy, but they know what is owed to them by whom! If you don’t pay your tax bill in full and on time, you can bet that bill is only going to grow bigger due to late payment penalties and interest. They’ll send you statements on a regular basis until the outstanding amount has been paid, and each of these statements will detail the amount of penalties and interest that have been charged. If you repeatedly fall behind on your payments, the IRD will implement a debt recovery action. Ouch! This is something you really want to avoid. But guess what? The IRD are all too happy to work with you on getting your tax debt paid, so getting in touch with them early on in the process is your best bet. Of course, ideally they’re hoping you can pay your debt off fast with a lump sum, but we all know how difficult that is in this financial climate.
If you fail to get in touch with them to arrange a payment plan or just to keep them in the loop about your financial hardship, that’s when the IRD can start garnishing your wages and your bank accounts if you’re holding out. And if your bank accounts are dry, well they can look at taking legal action, but this really is a last resort.
Remember, You’ve Got Options
Options are available, for real. The IRD wants their money and you want your freedom, so talking with them about your options is the only way forward when you have a big tax bill that you can’t afford to pay.
Enter into an Installment Agreement.
If you can’t pay your tax bill all at once, then an installment agreement might be the perfect way for you to pay off your debt. And it’s relatively painless: all you need to do is talk with an IRD agent on the phone and you can organize to pay your tax bill in monthly arrangements.
Ask for additional time.
If you play by the rules, stay in touch, and are completely honest, the IRD can be a very reasonable creditor. Based on your personal financial circumstances, you may be granted a brief amount of additional time to pay your tax in full. Additionally, the IRD can help go through your finances with you, to see where you might be able to tighten up your budgets to determine the best options for dealing with the debt. By looking at your current financial situation, your payment history and your ability to meet future obligations using established guidelines, they’ll be able to come up with payment options that won’t impact too much on your lifestyle.
Make a partial payment.
A small payment is better than nothing. So, if you have a nest egg that you’ve been saving for a rainy day, now’s the time to pony up. The more you pay off your tax debt now, means the less penalties and interest you’ll owe later. A lump sum payment will also indicate to the IRD that you mean business about paying off your debt, perhaps leading to additional penalty-free time to pay it off.
Make a Deal
Why not try to settle your tax debt for less than the full amount you owe? It might sound crazy but it’s been done before. The IRD considers a host of circumstances including your ability to pay, your income and expenses, and your assets. Generally, the IRD will only agree to this kind of deal if they think they won’t be able to collect the amount due within a reasonable period of time. Just keep in mind that 80% of offers tend to be rejected!
This is actually not an option at all. GOTCHA. But, that doesn’t stop countless people the world over from doing it. The IRD is smart – don’t underestimate how far their reach is. Don’t even consider leaving the country without dealing to your tax bill, unless you’re fine with being handcuffed upon your arrival back in New Zealand.
Bankruptcy: Not Your Best Option
Here’s another bad idea: bankruptcy. Again, this action can be just as tempting as leaving town, but it’s a last resort. In theory, bankruptcy might seem like a good idea: it’s a legal processing where people who can’t pay their debts can get a fresh, financial start. When you file for bankruptcy, all of your debts, including those pesky student loans, get written off. But there’s a price to pay.
The period of bankruptcy normally lasts for three years but this may be extended depending on individual claims. Over this period of time, you essentially become property of the state. For instance, you have to cooperate fully with the Official Assignee at all times. This includes requests for information, such as changes of employment, income and expenditure, and whatever else they might want. When you’re bankrupt you can’t be a director of a company, have credit cards, be employed by a relative, enter into business or even leave New Zealand without getting permission. This loss of freedom is a high price to pay to settle your tax debt, and the decision should not be taken lightly.
Future Proof Yourself
The best way to deal with big tax bills is to plan ahead for them so that you can pay the full amount on time. Keep track of your finances and manage your cash flows carefully so that you be ready for your tax payments. If planning ahead and budgeting don’t come naturally to you, then you might want to look at calling in the experts. Doing your taxes yourself can easily lead to silly mistakes that will result in terrifying tax bills. Take the worry out of the equation by entrusting us with your taxes – it’s what we do best, remember? So, if you’ve got a big tax bill on your desk that you’re not sure what to do about, get in touch. We’ll go through your paper work to make sure that you really do owe the amount that they say you do. Fingers crossed that it’s a simple mistake, but if not, you know now that you’ve got options.