It doesn’t feel great to file your tax return and find out you owe money. It’s like getting an unexpected bill or discovering your car won’t start! But just like your mechanic might offer you a payment plan, the IRS does, too. You actually have several options, and you can choose the one that works best for you.
First things first, you need to file your income tax return by the April 18 tax deadline. You probably discovered that you owed taxes after you finished your tax return and might be tempted not to file on time. Don’t be. File it!
What are your options for paying? You can request an “extension of time to pay” or “request an installment agreement.” There is a third option, an Offer in Compromise, that could work, as well.
Request an Extension of Time to Pay
If you are unable to pay your tax bill because of temporary factors, you can file your tax return, then request an extension of time to pay. This extension will get you up to 120 days to make the payment. There are no fees to get the payment extension, but interest and penalties will apply to the full tax liability until it’s paid. The cost is usually less than an installment agreement though. You can request an extension to pay your taxes by calling the IRS directly at 800-829-1040.
You may also qualify for an extension through Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship. Don’t forget: in order to get either extensions, you must file your income tax return in a timely fashion. The payment extension will not apply if your tax return is not filed or if it has been filed late.
Request an Installment Agreement
Probably the most common way to handle a tax bill that you can’t pay immediately is to set up an installment agreement. You can request consideration for an installment agreement either by requesting an installment agreement when you file with TurboTax or by filing IRS Form 9465, Installment Agreement Request, and mailing it in to the IRS (I recommend filling it out online).
Here’s the process of making the request:
- If you have not filed your tax return yet, you may submit Form 9465 when you file your taxes online.
- If you have filed your tax return, and cannot pay in full and the IRS has not yet issued you a bill (a balance due notice), you may request a pre-assessment installment agreement on current tax liabilities.
- If you have filed your tax return and you cannot provide full payment after receiving a bill from the IRS, you may request an installment agreement using the Online Payment Agreement Application.
- You may also request an installment agreement by calling the toll-free number on your bill or if you do not have a bill, call the IRS at 800-829-1040 (individuals) or 800-829-4933 (businesses).
The IRS will typically respond to your request for an installment agreement within 30 days of your application or phone call.
The IRS offers several convenient ways to make your payments under an installment agreement, including:
- Direct debit from your bank account;
- Payroll deduction from your employer;
- Payment via check or money order;
- Payment by Electronic Federal Tax Payment System (EFTPS);
- Payment by credit card via phone or Internet; or
- Payment by Online Payment Agreement (OPA).
There is a one-time installment agreement user fee of $120 to initiate the standard installment agreement, or a payroll deduction installment agreement. However, if you set the payments to be direct debited from your bank account, the user fee is just $52. If you are applying to restructure or reinstate an existing installment agreement, the fee is $50.
Your monthly installment payment should be based on your ability to afford the payments, that way you don’t default on the agreement. You have to specify the monthly amount, as well as the day of each month that the payment will be made (it can be anywhere between the 1st and the 28th of the month). Payments must be mailed in at least 10 days in advance of the due date, in order to make sure that the payment isn’t late, which will cause an automatic default in your agreement.
Offer In Compromise
If your inability to pay your tax bill is due to permanent factors, such as a job loss or business failure, you can request an offer in compromise (OIC) from the IRS. This is the type of agreement you may need to seek in the event that you will have no ability to pay your full tax liability in the foreseeable future (as opposed to a short term hardship).
In an OIC, you work out an agreement with the IRS in which you will pay a reduced amount of your tax liability, which the IRS agrees to accept as full payment of the obligation. In order to be considered for an OIC, all filing and payment requirements have to be current. In addition, if you are in bankruptcy proceedings, you are not eligible for OIC.
Whichever method you choose, be sure to get moving with the process as soon as possible. IRS debts are one of those things in life that don’t get better with age.