When we get the bad news that we owe taxes we hadn’t expected to owe, it can create a good deal of stress. But before you do anything drastic, there are a few options for you to consider.
1. If you have your returns ready and file electronically before April 15 but don’t have the cash available to pay the money due, you can authorize the IRS to deduct the payment from your bank account on the April due date without any extra fees. It’s just like scheduling an online payment for any other bill you have.
2. You can charge the money due to a credit card. The interest rate charged on your credit card may turn out to be better than the interest and penalties you’ll have to pay the IRS for late taxes. It may also prevent a negative impact to your credit rating. To pay your taxes by credit card, call (800) 272-9829. The IRS doesn’t charge a fee for credit card payments, but most credit card companies charge a processing fee for the transaction.
3. Take a short-term loan from your bank or credit union. This option often has lower interest rates than you can get on your credit card, especially if the amount you need isn’t very high. 4. Apply for an installment agreement with the IRS (IRS Form 9465). If possible, pay some of your amount due by the due date. Anything that you pay will help prevent interest and penalties from accruing on the amount paid by April 15th. Interest on your amount due is charged daily and there is also a monthly penalty fee.
If you cannot pay the total amount due, you can apply for an installment agreement with the IRS. This agreement allows you to make monthly payments until your account is paid in full. The payments can be paid by mail or by automatic deduction from your bank account every month. Automatic deduction is the best method, as it will ensure you make on-time payments and do not put your installment agreement at risk with late payments. You must fill out an Installment Agreement Request Form 9465 to apply. You can find this form at www.irs.gov or call your local IRS office for information. The IRS is generally very helpful in setting up this arrangement for you, as they want you to be able to pay your taxes. Understand that an installment agreement does not erase interest and penalties. On the contrary, interest and monthly penalties will accrue just like they do with any other loan. The advantage of an installment agreement is that it is not a lien and will not put your property or financial accounts at risk.
Important Note: If you enter into an installment agreement with the IRS, you must pay all taxes due on time in the following years. You cannot add to your agreement each year. The idea of the agreement is to help taxpayers who have inadvertently not had enough tax withheld, or who find themselves in financial hardship at tax time. Be sure you adjust your withholding so enough tax is paid in the following years. Also, any future tax refunds will not be sent to you but will be used to pay off your debt until you have a zero balance.
If you fail to keep the agreement, the total amount you owe will come due and may result in a lien (see below).
5. If you are facing serious financial problems when your tax is due and find yourself unable to pay any of the monies due, the IRS will consider temporarily deferring payment until you are able to pay. Try to avoid this if at all possible as interest and penalties will continue to accrue the whole time you are not making payments.
6. Members of the Armed Forces who are unable to make tax payments due to the nature of their service may be able to defer income tax payments until a time payment becomes possible. Check out the Armed Forces’ Tax Guide at www.irs.gov for information.
7. If none of the above options is open to you, there is one more possibility—an offer in compromise. This is an agreement that is reached between you and the IRS in which the IRS is willing to accept less than what you owe. Just be aware that it’s not easy to get the IRS to agree to a compromise. In fact, less than 1% of tax debts are resolved this way. If you’re interested in an offer in compromise, go to www.irs.gov for more information.
Don’t think that if you ignore your tax bill, no one will notice and it will just go away. Things go much better for you if you contact the IRS and let them know what your circumstances are. If they don’t hear from you, they may have to begin the collection process, which can involve things like putting a lien on your property.
If this happens, the IRS gets first claim to any monies from the sale of your property if you go into bankruptcy. Should you decide to sell your home because you want to move, you will have to clear the lien before you can sell. The IRS can also levy your financial accounts, which means they can confiscate money from your paycheck, savings account, Social Security benefits, and your retirement income. They can also take your car and your boat.
Important Note: If you don’t contact the IRS about your situation and a lien is filed, it is very difficult to get the lien removed before the debt is paid in full. A lien will affect your credit score and make it difficult to obtain financing for new necessities. Bottom line—be sure to contact the IRS if you can’t pay your taxes.