Afraid to file your tax return because you owe money you can't afford to pay? Big unexpected tax bills can set off your panic button… but you don’t have to worry about paying your taxes.
This situation is easier to handle than you think, especially when you take a proactive approach instead of ignoring the problem and hoping it just disappears. It won’t.
The most important thing to do is to file your current tax return on time even if you can’t pay the full balance due by the filing due date. If you can make any payment at all, even if it’s only a small fraction of the taxes you owe, send it in.
Every dollar you send now cuts down on the interest and penalties you may eventually owe. But we’ll also talk about how you can minimize or even eliminate at least some of those extra charges no matter how long it takes to pay off your tax bill. While the IRS cannot get rid of any interest that’s built up on your tax debt, they can (and often do) waive penalties.
There are four IRS-related options to help you handle tax debts that are just too big to pay all at once. The IRS is willing to work with anyone who legitimately can’t pay in full on time, as long as you contact them. Your basic IRS-involved options include:
Let’s take a quick look at each, so you can see which makes the most sense for your situation. And remember, for the IRS to consider giving you extra time, your tax return has to be filed.
People who can’t pay their tax bills right away may be able to qualify for up to 120 days of extra time to pay. The IRS doesn’t charge a fee for this kind of extension, but they will charge interest – and possibly penalties – until your taxes are fully paid off.
If you owe less than $100,000, you can file an Online Payment Agreement (OPA) application online. As soon as you’re done applying, they’ll let you know if you’ve been approved for the extension of time to pay.
When 120 days isn’t enough time for you to pay off your tax bill, the IRS also offers installment agreements. These plans act like regular loans, where you make monthly payments on the debt.
If you owe less than $50,000, you can apply for an installment plan using the apply for an installment plan using the OPA system system.
Unlike the short-term extension, the IRS charges for this kind of tax payment plan. But you can minimize those fees (to just $31) by using the online OPA application and choosing the direct debit payment option (more on payment options in a second). The maximum fee – if you apply on paper and don’t use direct debit – is $225.
For their installment plans, the IRS offers some monthly payment options, including:
With the installment plans, you get to choose how much you can pay monthly. So make sure it’s an amount you can realistically handle every single month so you don’t default. You can also pick the payment date that’s most convenient for you - any date from the 1st through the 28th). Just remember that the IRS has to receive your payment by the due date you chose.
If you’re in a serious financial crisis, paying anything toward your tax bill could mean you won't be to pay your basic living expenses. In that circumstance, you can ask the IRS to delay collections until you are able to make payments. They'll almost always give you that financial breathing room.
Your tax debt would not disappear. It would just be on hold from collections. You'd still be charged interest and any applicable penalties the whole time. But at least you wouldn’t have to deal with collection agencies or worry about IRS actions against you. To ask for a delay, contact the IRS at 1-800-829-1040.
Note: Due to COVID-19 and IRS backlogs, some calls to the IRS are still going unanswered. The agency is offering limited assistance to some tax professionals. If you can't reach the IRS, you can try the Taxpayer Advocate Service.
An OIC allows you to settle with the IRS for an amount less than the total taxes you owe.
But this process is not nearly as easy as TV commercials (“We’ll settle your tax debt for pennies on the dollar!!!”) make is sound. There’s a lot of paperwork to file, and the IRS grants very few of these (more than 3/4 get rejected) – only when they are sure you truly won’t be able to pay the full amount.
You can find out if you might qualify by using the IRS Offer in Compromise Pre-Qualifier tool. If you do qualify, the next step is to fill out a lot of forms in the OIC Booklet and pay a $205 non-refundable application fee (unless you qualify for low income certification). Be aware: if the IRS accepts your offer, you have to pay 20% of the agreed-upon amount up front.
I usually wouldn't recommend paying your tax bill with a credit card. But it can make good financial sense if:
In most other circumstances, it won’t do your overall financial situation any good to charge your tax payment. You’re probably better off working with the IRS to settle your bill and paying their low-rate interest.
If you have questions about this whole process, or need help figuring out your taxes, you can contact me here.