Next to preparing and filing your tax return and IRS audits, owing taxes is one of our biggest fears. The good news is that well over 75 percent of all taxpayers so far this year have gotten a federal tax refund. The not so good news is that leaves one out of four owing taxes to the IRS when they file. So what should you do if you owe taxes? The IRS has several options available, one of them likely to suit yours needs.
The first and most important point is to pay your taxes by April 15 and pay all of them. If you cannot pay all of your taxes when you file or with your extension (more on that in a moment), you'll want to pay as much as you can by April 15. If you can't pay your tax bill in full on April 15, then one option is to pay as much as you can and then enter into an Installment Agreement with the IRS. Paying a tax balance due with an installment plan is very useful but be aware that compounding interest on a daily basis makes IRS funding of your unpaid balance a potentially expensive proposition, and even the IRS suggests you find the funds through some other means before using their Installment Agreement. Let's look at other payment options available through IRS:
- Paying by check or money order - Make sure you put the check and the Form 1040-V, Payment Voucher in the mail no later than April 15. When filling out the payment slip make sure you make it payable to United States Treasury, and put the primary taxpayer's Social Security number and the tax year in the memo section of the check or on the Money Order.
- Paying by electronic funds transfer (EFT) - This is quickest and safest way to pay. EFT is an authorization from you for the IRS to withdraw the payment directly from your savings or checking account. You must provide the bank routing number (RTN), the depositor account number (DAN), and the date the payment is authorized to the IRS. You can provide the necessary information to the IRS when e-filing your return or by enrolling in Electronic Federal Tax Payment System (EFTPS) free of charge.
- Credit or debit card payment - You may pay your taxes using a credit or debit card and one of the IRS authorized e-pay service providers. Unlike other businesses accepting credit cards, the IRS makes you pay the convenience fees. The fees vary between the providers; credit card fees are between 1.8% and 2.5% of the payment and debit card pay fees are between2.49 and3.95.
- Paying by Cash - Some local IRS offices accept cash payments. Check the listing for your local IRS office to determine if they accept cash payments.
- And finally, Enter into an Installment Agreement - The IRS offers two different installment agreement plans; one that allows up to 120 days to pay your bill in full and another that offers up to 72 months. Make sure you know how much you can pay, and the best date to make the payment, each month when you enter into the agreement. There is a fee of120 (52 if you pay using a direct debit method or43 if your income is below a certain level) to enter into the 72 month plan.
Set up an installment agreement by completing Form 9465, Installment Agreement online. Form 9465 can also be mailed to the IRS, but will take longer to process. An installment agreement is automatically approved if the taxpayer owes less than50,000 in taxes and plans to pay off the taxes within 72 months.
If you can repay the IRS within four months (120 days) you will save some money. Make all payments in full and on time, if you find you have some life changes that make it difficult to make your payment, contact the IRS immediately. The agreement eliminates the underpayment penalty while you pay your tax debt, however, if you default on the payment plan the penalty will be assessed back to the due date of the tax return. You will receive a bill from the IRS at the end of the payment program for all interest assessed during your installment series. Unfortunately, IRS agents are unable to suspend or reduce interest on a tax debt without approval.
One final consideration that many taxpayers sometimes misunderstand: If you cannot get your tax return completed and taxes paid by April 15, the IRS allows for an automatic six month extension by filing form 4868. The extension is ONLY for additional time to file the forms. You must pay the majority of your taxes by April 15th when you file the extension. More on extensions in the next piece coming soon.
Owing the IRS can be a costly matter, but it is completely manageable if you take care of it and don't ignore it. Your local trusted tax preparer can help you figure out which route is best for you if you have questions. In any case file your tax return or an extension by April 15th. If you are not one of the lucky refund taxpayers, and you owe, then pay your taxes or at least what you can and consider one of the above alternatives to pay the balance.