Another bill, oh no! It doesn’t feel great to file your tax return and find out you owe money. It’s like heading out the door and discovering your car won’t start! But don’t worry, you actually have several options if you owe money on your taxes. Here is some information to help decide which option is best for you.
What Are Your Options for Paying?
- Short term payment plan
- Long term installment agreement
- Offer in Compromise (OIC)
- Temporarily delay the collection process
Request a Short Term Payment Plan
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 short term payment plan, but interest and penalties will apply to the full taxes you owe until they are paid off. You can request a short term payment plan online if you owe less than $100,000 in combined tax, penalties, and interest.
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 extension, you have to file your income tax return in a timely fashion by the tax deadline.
Request a Long Term 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 which allows you to pay your tax debt over six years. You can request consideration for an installment agreement by going online and using the IRS Online Payment Agreement Application. The IRS does charge a setup fee for a long term installment agreement and interest and penalties will also apply to the taxes you owe until they are paid off. Although you will be charged interest and late payment penalties until the taxes you owe are paid in full, the failure to pay rate is decreased from .5% to .25% per month while your installment agreement is in effect.
The IRS will typically respond to your request for an installment agreement within 30 days of your application. 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
- Payment by Online Payment Agreement (OPA)
If you apply for the installment agreement using IRS Online Payment Agreement Application and request the payments to be direct debited from your bank account, the user fee is $31. If you request an installment agreement via phone or by mail you may be charged $149 to set it up. The online request is the best route right now as you may experience delays trying to request an installment plan by mail or via the phone. If you are applying to restructure or reinstate an existing installment agreement online, the fee is $10.
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).
Offer In Compromise
Offers in Compromise require a $205 application fee. Exception: If you are an individual and meet the Low-Income Certification guidelines, you are not required to send any money with your offer. 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.
In an OIC, you work out an agreement with the IRS in which you will pay a reduced amount of the taxes you owe, 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.
Temporarily Delay the Collection Process
This is the type of agreement you may need 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). If you cannot pay any of your tax debt, then your account could be classified as “currently not collectible.” The IRS could then approve and temporarily delay collection until your financial condition improves.
Being currently not collectible does not mean the debt goes away, it means the IRS has determined you cannot afford to pay the debt at this time. Prior to approving your request to delay collection, you may be asked to complete a Collection Information Statement (Form 433-F, Form 433-A or Form 433-B) and provide proof of your financial status (this may include information about your assets, monthly income, and expenses).
Whichever method you choose, get the process started as soon as possible, and don’t hesitate to communicate with the IRS to let them know your situation.
Don’t worry about knowing these tax laws. TurboTax has you covered and will ask you simple questions about you and give you the tax deductions and credits you’re eligible for based on your entries. If you have questions, you can connect live via one-way video to a TurboTax Live CPA or Enrolled Agent with an average 15 years experience to get your tax questions answered from the comfort of your home. TurboTax Live CPAs and Enrolled Agents are available in English and Spanish, year round and can also review, sign, and file your tax return. Who knows, by the time TurboTax searches for all of the tax deductions and credits you’re eligible for you may be getting a tax refund.
*Victims of the April tornadoes, severe storms, and flooding that occurred in Mississippi, Tennessee, and South Carolina are granted extended tax deadlines until October 15 instead of July 15 to file tax year 2019 federal individual and business tax returns including any payments of taxes owed.