Tax bill too big to pay all at once? Sign up for an IRS payment plan
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Do you owe the IRS money this year? You have several options for paying your tax online. But if you can’t pay it all at once, the IRS gives you payment plan choices.
Note, however, that your first step must be to file your tax return on time. Failure to do so can result in stiff penalties.
Paying with plastic
Some taxpayers find the easiest way to pay is with a credit card. The IRS has awarded contracts to three companies to accept payments by plastic: Official Payments, Link2Gov and WorldPay. They take American Express, Discover, MasterCard, Visa or a variety of debit cards.
Each company has its own fee schedule that will add to your bill.
If you do pay a fee, make a note of it for next year’s filing. The IRS has ruled that this amount is deductible as a miscellaneous itemized expense.
Keep in mind that if you don’t pay off your credit card in full, you’ll start racking up interest charges on your account. In some cases, though, your credit card interest charges might fall below IRS penalties and interest you’d owe if you don’t pay on time.
A low-interest credit card may be a good option in this scenario.
If your tax bill is too large for a credit card, the IRS will take monthly payments.
Approval is not automatic unless:
- You owe less than $10,000.
- You have paid taxes in a timely way during the past five years without entering into an installment agreement.
- You can pay the full amount within three years.
To get the program going, you can attach Form 9465, Installment Agreement Request, to the front of your tax return. Or, you can request an installment agreement online at the IRS website if the total amount you owe is not more than $50,000.
Taxpayers who seek an installment plan must provide detailed financial information, including data on equity assets, that the IRS will verify.
Keep in mind that paying over time, even to Uncle Sam, will cost you more.
- Expect to pay a one-time user fee of $225, up from $120 last year.
- The fee drops to $107 for direct-debit agreements.
- Some lower-income taxpayers could pay a reduced fee of $43.
- Applying online is your best bet: You pay a $149 one-time fee, or only $31 if you agree to a direct-debit plan.
You’ll be billed for any fee when the agency sends you a notice detailing your payment terms. Plus, penalties and interest continue to accrue to your unpaid tax bill. The IRS may also file a federal tax lien against you, which will be released when you pay off your installment loan.
Another way to deal with a large tax bill is with a home equity loan. That way you won’t have to pay IRS penalties and fees.
Offer in compromise
What if you can’t pay off your tax bill, in whole or part, in three years or five years or even longer? Then it might be time to negotiate.
The IRS might be willing to accept a lump-sum payment offer of less than your total tax bill if it is realistic. In these cases, the agency hopes to get some taxpayer money sooner than it would after years of costly collection efforts.
The IRS will review your financial situation and future income potential to determine whether your offer is appropriate. Be warned, however: This program was designed only for extreme cases, and few filers will qualify for the program. If you believe your situation does indeed meet the requirements, you need to file two forms: Form 656, Offer in Compromise, and Form 433-A, Collection Information Statement.
To find out whether you qualify for an offer in compromise before filling out the paperwork, use the IRS’ online pre-qualifier tool. The questionnaire format will let you know if you’re eligible, as well as help determine an acceptable preliminary offer amount.
Options for offers in compromise include:
- Lump sum cash offer — This must be paid in five or fewer installments within five months after the offer is accepted. You must include 20 percent of the offer amount plus a $186 application fee.
- Periodic payment offer — This is paid in six or more monthly installments within 24 months after the offer is accepted. You must produce the first proposed installment payment plus $186.
The $186 fee is waived for qualifying low-income taxpayers.
The IRS has created a special website with “what if” scenarios regarding tax and payment issues for taxpayers who are having a hard time making their payments.
Regardless of which payment plan method you choose, make your decision now. Delay will only compound your financial and tax problems since penalties and interest charges will continue to accrue. By sending in any amount when you file your return, at least you’ll ultimately reduce your interest and penalty charges.
Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York. He provides guidance and strategies to improve clients’ financial well-being.
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