The first rule of paying off tax debt is to make sure you file your return on time, even if you can’t pay it your taxes immediately. Doing so, you’ll avoid the IRS’ “failure-to-file penalty” of 5 percent per month (to a maximum 25 percent) of your balance due. You’ll still face that penalty each month your bill is outstanding, but the penalty is only 0.5 percent of the amount you owe.
Rather pay with plastic?
There are multiple tax debt payment options. Take a look at what you owe. Some taxpayers find the easiest way to pay, either part of what they owe or their full tax bill, is with a credit card. There are only two companies the IRS has authorized to accept payment via credit card. Both Official Payments and Link2Gov accept payments from electronic and paper filers – via phone or the Internet, and both accept American Express, Discover, MasterCard or VISA.
You can contact Link2Gov Corp. at (888) PAY1040 or (888) 729-1040. Or you can visit the website at Pay1040.com.
You can contact Official Payments Corp. at (800) 2PAYTAX or (800) 272-9829, or you can visit their website at Officialpayments.com.
While either company can settle your debt, each company charges about 2.49 percent of your tax bill (a minimum of $1) for their services. But any fee you pay will be deductible next year as a miscellaneous itemized expense. Also, you’ll start racking up interest charges on your account if you do not pay the credit card in full. In fact, your credit card interest charges might fall below IRS penalties and interest you’d owe if you don’t pay on time. So add things up and pick what works best for you. Make sure you don’t pay the IRS, or your credit card company – more than necessary.
If your tax bill is too large for a credit card, the IRS will take monthly payments. You even get to pick your monthly payment amount and the day it will be due.
In fact, if you’ve previously filed (and paid) taxes on time, your tax bill is less than $10,000 and you convince the IRS that you can’t come up with that much all at once, the agency can’t turn down your request. Your installment plan, however, must pay off the due tax in at least three years. To get the program going, attach Form 9465, Installment Agreement Request, to the front of your tax return.
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. Congress officially granted the IRS the power to resume partial payment installment agreements as part of the American Jobs Creation Act of 2004.
While the IRS argued for legislative reinstatement of the partial-payment option, approval is not automatic. Taxpayers who request a partial-payment installment agreement must provide detailed financial information, including data on equity assets the IRS can verify. The IRS will review your arrangement every two years to determine whether your financial status has changed, and if it has improved, the amount of installment payments could increase or the agreement could be terminated.
Regardless of whether you pay off your tax debt in full or partially via an installment agreement, keep in mind that paying over time, even to Uncle Sam, will cost you more. The IRS charges a one-time fee of $105 for monthly summaries and payment forms. The IRS charges $52 for direct debit agreements. Some lower-income taxpayers get a reduced fee of $43 (the previous user fee for all installment agreements).
Any fees you owe will be included in your first payment. And remember, penalties and interest continue to accrue to your unpaid tax bill. The IRS sometimes files a federal tax lien against you, which will be released when you pay off your installment loan.
If you want to apply for an installment arrangement, the IRS now accepts online applications. A downloadable PDF is at https://www.irs.gov/pub/irs-pdf/f9465.pdf
Let’s make a deal
If you can’t pay off your tax debt substantially, in three years to five years, then it might be time to negotiate. The IRS might be willing to accept an offer in compromise (OIC), a lump-sum payment you offer to make, less than the total amount of tax you owe. In such cases, the agency hopes to reclaim some taxpayer money sooner, without years of costly collection efforts.
The key is the reduced amount must rationally reflect your ability to pay off tax debt. It’s not a ruse to haggle with the IRS to get your tax bill reduced. The IRS is stepping up its efforts to weed out taxpayers who use the OIC route merely as a delaying tactic. As of Nov. 1, 2003, any taxpayer making a reduced payment offer is required to include a $150 non-refundable application fee with their request. The IRS hopes this means they will hear only from folks who honestly need to negotiate their bill.
The IRS will review each applicant’s financial situation and consider future income potential before determining if an offer is appropriate and accepted. There is a caveat, this program was designed for extreme cases, and many filers will not qualify for the program under the existing terms. If you feel your situation does meet the requirements, you must file two forms: Form 656, Offer in Compromise, and Form 433-A, Collection Information Statement. You must include the $150 application fee along with the completed Form 656-A, the Income Certification for Offer in Compromise Application Fee (The fee is waived for filers who have little or no income, by way of a poverty exception. If either form or the fee is missing from your package, the IRS will return your offer application “without further consideration.”
If you submit everything as required, and the IRS determines you do not qualify, your offer is rejected and you are out the $150. If the IRS accepts your offer, your fee will go toward your new payment amount.
Your offer must include a 20 percent payment for lump-sum cash payment offers or your first installment payment if you’re seeking a periodic payment plan – in addition to the $150 application fee.
The IRS is willing to work with taxpayers who are having a hard time in the current economy meeting their obligations, tax or otherwise. So, call the IRS and let the agency know you need help meeting your tax debt. The IRS will not be ignored. If you don’t take action, the IRS will continue to assess penalties and interest charges.
Regardless of which tax debt payment option you decide to proceed with, make a decision now. Delay will only increase your interest and penalties and compound your tax problems. Pay something immediately. Any amount you send to the IRS when you file your return will ultimately reduce your interest and penalty.
Change your process
Going forward, you should consider adding the Estimated Tax Payment option to prevent future tax debt and owed balances. These future balances can cause termination of the installment agreement for self-employed people.
If you are W2 employee you may want to consider changing your withholding status from Married with two exemptions to Single with one, or even zero exemptions, to make sure enough taxes are withheld to cover your tax liability.
Remember, the W2 employee has the luxury of paying only half of his Social Security and Medicare, while the self-employed individual must pay everything on their own. So think when you take on work, whether you want to work on a 1099 or a W2.
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