No one likes unexpected bills — especially big unexpected bills. This time of year, one of these nasty shocks can come in the form of owed income taxes. Common candidates for a hefty income tax bill include the self-employed, especially if you earned a decent income in 2014 but didn’t make sufficient quarterly payments.
If it looks like it’s going to be difficult to pay all that you owe by April 15, here are your options, along with some key facts you need to know. (See also: Don’t Have Enough to Pay Your Taxes?)
Understanding the Rules
There are two distinct aspects involved in paying taxes: filing your return and paying it. Not filing your return on time and not paying what you owe come with different ramifications. It may surprise you to know that if you don’t file your return on time, even if you can’t pay all that you owe by April 15, you’ll face the biggest penalty.
Failing to file on time and not paying all that you owe by the due date will cost you a monthly penalty of 5% of your tax bill plus interest. However, if you do file on time, or request a filing extension by midnight on April 15, the penalty drops to half of 1% plus interest. So, at the very least, file your return or request an extension by April 15.
Paying as much as you can by the filing deadline will lower your costs as well, since the late payment penalty is based on a percentage of what you haven’t paid.
Next, you’ll have to come to an agreement on how to pay the rest of what you owe. Don’t let this slide. Uncle Sam may look friendly, but he has some collection tactics available to him that most other creditors don’t. This could be garnishing your wages, taking money from your bank accounts, or slapping a lien on your property.
Don’t let things get to that point. Instead, explore the following options.
If you think you can pay all of what you owe within 120 days of April 15, apply for an online payment agreement. You can also call the IRS at 1-800-829-1040 for more information. There is no up-front fee for a short-term payment extension. However, a late-pay penalty (half of 1% of the balance owed per month) and interest will be charged. Still, that should amount to less than what you’d be charged with a longer-term payment agreement.
If you can’t pay what you owe within 120 days, you may be eligible to pay your tax bill in monthly installments over the course of up to 72 months. There is a fee of $120 to establish an installment agreement, or $52 if you agree to have your payments automatically deducted from your bank account. While you’ll still have to pay interest, if you filed your return on time, the monthly late-pay penalty will be half of 1% of what you owe.
If you owe the IRS $50,000 or less (including penalties and interest), you should be able to set up the online payment agreement. If you owe more than $50,000, you’ll need to complete Form 9465 and supply the IRS with a Collection Information Statement (Form 433-F).
If your circumstances are such that you can’t pay any of what you owe, and you’re not sure when you’ll be able to, the IRS may temporarily delay collection until your financial condition improves. However, your debt will grow because penalties and interest will accrue until you come up with the full amount. During the temporary delay, the IRS will continue to review your ability to pay. The government may also place a lien on real estate or other property you own. Contact the IRS at 1-800-829-1040 for more information about requesting a temporary delay.
Offer in Compromise
If you can’t afford an installment agreement, you could offer to settle your tax debt in one lump sum totaling less than what you owe. Whether you’ll qualify depends, in part, on your income, expenses, assets, and the IRS’ assessment of your ability to pay. However, be forewarned: Relatively few offers in compromise are accepted. There is also a non-refundable $186 application fee, and most applicants have to make an up-front, non-refundable partial payment when they apply. So, make sure you feel confident about meeting the requirements. You’ll need to demonstrate that situation is such that you will never be able to pay back everything you owe. Details are in the IRS’ Offer in Compromise booklet.
Consider Inside Assistance
If you are having a difficult time resolving an IRS tax dispute, contact the IRS Taxpayer Advocate Service. This is an independent organization within the IRS designed to provide free help to people whose tax issues are causing financial difficulty. Here’s how to contact the Taxpayer Advocate Service office nearest you.
Avoid Outside “Assistance”
You may be tempted to turn to a private company for help in settling your tax debt for less than you owe through an offer in compromise, but beware. Such companies often charge steep up-front fees, and there are some unscrupulous players in this field.
If you have a big tax bill you can’t pay, you may be tempted to just ignore it. But that will make the problem worse as interest and penalties pile up. As just described, there are several options for paying what you owe over time.
For more guidance on what to do if you can’t pay your tax bill, read, The “What-Ifs for Struggling Taxpayers” on the IRS web site.
Whether you owe money this year or are due for a refund, right now might also be a good time to think ahead and start planning for next year’s tax season.
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