Do You Owe the IRS and Cannot Pay in Full
What are options available if you have a balance due on your tax return, and you do not have enough money to pay in full?
- Pay as much as you can by the Filing (April 15th) deadline.
Even if you cannot pay the IRS in full, paying what you can by the deadline helps to limit the amount of late charges the IRS will charge.
- File an extension and pay in full by the Extension (October 15th) deadline.
Pay as much as you can now and file an extension. Then file your tax return by the extension deadline and pay the remaining balance in full by the time you file.
Here are the consequences of this action plan. The IRS will charge late fees on payments made after the April 15th deadline. By late charges, I am referring to the penalty for paying late (which is half of one percent per month of the outstanding balance) plus interest (currently 4% per year, calculated for each day there is an outstanding balance). Combined, the late payment penalty and interest add up to an annual rate of 10%.
This procedure avoids the more onerous late filing penalty of 5% per month of the unpaid balance. The late filing penalty kicks in only if you file your tax return late (meaning after April 15th without an extension or after October 15th if they do have an extension).
- Request a short-term deferment and pay in full within 120 days.
This procedure means you are filing your tax return by the deadline, and you can comfortably pay the IRS the full amount due within 120 days, which is about four months.
To do this, simply call the IRS after filing your tax return. The phone number is 1-800-829-1040. Explain your situation to the IRS agent, and let them know when you can pay in full.
Here is what the IRS says about this payment option:
“If you cannot pay in full immediately, you may qualify for additional time –up to 120 days– to pay in full. There is no user fee for a full payment agreement request; however, interest and any applicable penalties will continue to accrue until your liability is paid in full.
The IRS will charge late fees, namely the penalty for paying late (at half of one percent per month) and interest (at 4% as an annual rate) on amounts paid after the April 15th deadline.
- Set up a monthly payment plan and pay in full within six years
In IRS terminology, payment plans are referred to as installment agreements. There are several types of installment agreements. If you owe $50,000 or less and you can pay off your balance due within six years, the IRS will set up an installment agreement without a lot of hassle.
The minimum monthly payment that the IRS will accept is your outstanding balance due divided by 72. That’s 72 months, which is six years. (The IRS also has a $25 minimum as well. So if you owe $1,000, for example, the minimum monthly payment would be $25 a month, not $14 a month).
The IRS will charge late fees, namely the penalty for paying late.
- Set up a payment plan based on your current financial situation.
Let’s say you owe the IRS $10,000 and the minimum payment the IRS will accept for an installment agreement is $139 per month (that’s $10,000 divided by 72 months).
The thing is, you cannot afford $139 a month right now.
In this situation, it may be possible to set up a payment plan that is based on your current financial situation. This is referred to as a partial payment installment agreement. Here’s how it works. First, you need to tally up all your assets, your income, and your basic living expenses by filling out Form 433-F. Both you and the IRS will analyze these financial details. At its simplest, what we are looking at is what’s left over every month after we subtract basic living expenses from your income. That amount that’s left over is the amount of your monthly installment agreement.
This procedure requires quite a bit of recordkeeping, and you’ll need to have an in-depth conversation with an IRS agent.
- Settle with the IRS for less than the full amount.
This is called an Offer-in-Compromise. We negotiate with the IRS to settle the amount you owe. This is not “let’s make a deal”, however. The IRS takes a methodical and mathematical approach to calculating settlements. For an Offer-in-Compromise to be successful, the taxpayer must offer to pay the IRS an amount of money that is at least the amount left over each month after subtracting basic living expenses from monthly income, multiplied either by 12 or by 24; plus the quick sale value of all the taxpayer’s assets.
It can take several months to complete the offer-in-compromise process, and the IRS does not approve all offers.