Can’t Pay IRS Taxes in Full? Tax Payment Options

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Today’s post is a guest post by Matt Robinson.  He is a tax accountant and writer for TaxDebtHelp.com who helps taxpayers with IRS payment plans and tax debt settlements.  If you want to submit your own guest post you can get details here.

So the tax deadline is quickly approaching and you have completed your tax return and realize that you won’t be able to pay your taxes owed by April 15th. Maybe you had some large unexpected expense or possibly just poor financial planning, not to worry, you have options. Since you cannot pay the IRS in full, your goal should be to minimize your tax liability by picking the option that will ensure the least amount of interest and penalties to be paid. First thing you need to understand are the basic penalties the IRS can charge people for not paying.

Tax Penalties Basics
  • Failure to File Penalty: The failure to file penalty is 5% a month and can grow to 25% of the total balance owed. This penalty will be charged if you do not file and do not pay your taxes.
  • Failure to Pay Penalty: The failure to pay penalty .5% a month and can grow to 25% of the total balanced owed. This penalty will be charged if you file, but do not pay your taxes.

As you can see the easiest and largest penalty to avoid is the failure to file tax penalty. One common misconception individuals have is that if they can’t pay, they shouldn’t file. People do this because they think if they don’t file then the IRS won’t know how much they owe, but the IRS will almost always find out how much they owe. The IRS does offer various solutions to paying your taxes back if you can’t pay in full. The method you choose depends upon how long you think it will take you to pay the taxes back and how much money you owe. Below are the most common options for individuals to consider.

Tax Payment Options
  • 120 Day Extension to Pay: If you know you will be able to pay off the taxes owed within 120 days this could be your best option because you will not be charged a user fee like you would with setting up an installment agreement (in details below). The IRS usually approves short term extensions, but they may deny you if they don’t think you will be able to pay. To request, you can use the Online Payment Agreement Application or call the IRS. After you request a 120 day extension, you should receive a written confirmation from the IRS within 10 days. You will typically still be charged the full failure to pay penalty, but you will likely still owe less in total than if you applied for an installment agreement because you will avoid the $105 user fee.
  • Pay on credit card: If you cannot pay within 120 days you can also consider paying on credit card. There are times when the interest and fees charged by your credit card company can be lower than the combination of penalties and charges the IRS will charge you. If you choose to pay by credit card you have to realize that you will also be charged convenience fees based upon the total amount of taxes you are paying off. The convenience fees range from 1.95% of the balance to 2.35%. In order to find your total additional cost for charging on your credit card you will have to consider the convenience fees plus the interest you will be charged monthly by your credit card for carrying the balance.
  • Installment Agreement: If you cannot pay within 120 days this is a great option to consider against paying on credit card. Depending upon your credit card interest rate and the total amount of taxes you owe, this option can save you money over the long term. The factors to consider with an installment agreement are the $105 user fee, failure to pay penalty (only .25% per month, entering an installment agreement cuts this in half), and interest (currently at 4% compounded daily). An installment agreement will allow you between 36 months and 60 months to pay off the entire balance owed. There are many different kinds of installment agreements that vary based upon amount owed and how much you can afford to pay monthly. In order to apply for an installment agreement you can either use the Online Payment Agreement Application or you can file IRS Form 9465. If you owe over $25,000 then you must file IRS Form 9465 and complete a Collection Information Statement (IRS Form 433-A).

The three options above are the most common solutions individuals use when they can’t pay their taxes in full. In order to choose the best method, you must do some simple calculations by taking into consideration the amount of time you need to pay, the total amount of tax owed, and the amount your credit card charges you in interest a month. A quick analysis could yield you the best way to pay back your taxes and potentially save you hundreds or even thousands of dollars.

Comments

  1. Arthur @ FinancialBondage.org says

    For what it’s worth, A loan from a bank or credit union (to pay the taxes you owe) may be cheaper than paying the high interest fees the IRS will charge you.

      • Elcrapocrew says

        This is exactly why I put a big fat “0 ” at the bottom of my W4! You can say all you want about being self disciplined enough to save money up through the year to pay your taxes, etc, etc. But I have first hand experience of what happens when the federal government screws up and then penalizes YOU for their mistake. A few thousand dollars may not sound like much but when you are dealing with a budgetary surplus of only a few dollars a month it can quickly become an insurmountable problem.

        As for taking out a loan, I don’t see the logic in that at all. Money owed is money owed. Besides, if you can’t afford to pay the IRS your bank is not going to be too hot to give you a loan at all, much less one with a favorable interest rate.

        To me, this advice doesn’t sound optimal. You are advising a person shift their debt to a less aggressive debtor, thats fine and probably always a good idea. However wouldn’t it be better not to be in debt at all?

        So long as we are trumpeting the virtues of self discipline, is it not another form of self discipline to learn to live off a little less income a month?

        Remember that bit about an ounce of prevention being worth a pound of cure?

  2. says

    Hey Craig,
    I just wanted to make sure people don’t make a mistake I made a few years ago before getting better with finances and learning a few tips on budgeting.

    Do avoid filing just because you don’t think you’ll be able to pay.

    File, pay what you can now, and follow Craig’s advice in the article for the remaining.
    Cheers,

    Guy
    .-= Guy G.´s last blog ..How to Save Money – Tips on Budgeting =-.

    • says

      @Guy
      Thanks for the good reminder. Yes, file even if you don’t have the money. You can’t run from the IRS – they are just too fast.

  3. says

    Of course the ultimate scenario would be to do away with IRS entirely. :) I personally feel income tax is not Biblical as it is a form of holding back wages, (mentioned in James). In the New Testament where it says we are to pay Ceasor what’s due him, I think that was referring to property taxes or perhaps some other type, but not income. On the other hand, if IRS didn’t exist, my nephew would be out of a job.
    .-= Tammara´s last blog ..QuiBids and Pinching Your Dollars =-.

    • says

      @Tammara
      I’m not a fan of the IRS system either, but I guess that doesn’t matter because paying taxes is not elective. The biblical teachings on submitting to governing authorities would also be a reason to pay taxes.

  4. says

    Great post. I live in an area of New Jersey in which the IRS extended our deadline to May 11 because of floods and severe weather from a weekend long winter storm in early March. The NJ Div of Tax followed suit.

    Best,

    Richard

  5. says

    Financially strapped taxpayers also can use an installment plan to make partial payments of tax liability. The IRS previously had allowed partial installment payments but stopped the practice in 1998 when an IRS attorney raised questions about the IRS’ authority to accept such payments without statutory authority.

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