IRA contribution, and possible tax deduction, time
April 18 also is deadline to file FBAR foreign assets report

Options if you can't pay your tax bill in full

I will pay my taxes blackboard

I understand not filing until the absolutely latest minute. Been there, done that. I also get why some people delay the inevitable: they owe taxes. Been there, done that, too.

Sometimes, that amount due the U.S. Treasury seems impossible to pay. Thankfully, I've never quite been at this stage, but it happens to many filers.

The first thing to do if you find yourself in this situation is to not panic. Then look at your options.

The Internal Revenue Service offers taxpayers a variety of ways to pay their unexpectedly large tax debts.

Pay something — and file — to reduce penalties: Your best move is to pay something. Anything. And on time, which Tax Day. Again, that's April 18 this year.

Any amount you can pay will help reduce interest and penalties, which are assessed as a percentage of the tax you didn't pay.

The failure-to-pay penalty is 0.5 percent of unpaid taxes for each month or part of a month the tax remains unpaid. It can reach a maximum of 25 percent of your unpaid taxes.

This penalty, as well as interest charges, start to accrue on unpaid tax amounts as soon as Tax Day passes.

Also, even if you can only pay a small portion of your tax bill, file your return. If you don't, you'll face a separate failure-to-file penalty, which is 5 percent of your due tax.

You do get a tiny bit of a tax break when the IRS assesses both failure-to-file and failure-to-pay penalties. The non-filing penalty will be reduced by the amount of the payment failure fine, making the combined penalty charge 4.5 percent.

But 0.5 percent is much better than 4.5 percent, especially if you owe a lot. So file. Pay what you can. Then figure out how to cover your tax balance that's just too darn big to pay in one fell swoop.

Here are some suggestions from the IRS on how to do that.

Get a loan: In many cases, the cost of a loan from a private lender may be lower than the combination of interest and penalties the IRS must charge under federal law.

The interest rate that's added to any penalty amount you owe currently is 4 percent per year. Note that it's compounded daily.

The applicate IRS interest rate also is adjusted quarterly, meaning that with the recent Federal Reserve Board interest hikes, it will go up this summer.

So run your tax bill's penalty and interest charge numbers, and check into loans that could come cheaper in helping you meet your tax debt.

If getting private financial help for your tax bill isn't feasible, then Uncle Sam's tax collector can be your lender.

The IRS offers a variety of ways to pay over time.

Online payment plans: In keeping with its efforts to digitize taxes, the IRS offers online options to set up tax payments.

The advantage here is that, in most cases, taxpayers don't have to deal with an IRS representative in person or even by phone.

In fact, the agency says if a taxpayer just filed a return and owes a balance, the filer may be able to set up an online payment plan online before they even receive a notice or bill.

 

Online applications to establish tax payment plans
are available Monday through Friday,
6 a.m. to 12:30 a.m. Eastern Time.

On weekends, apply
between 6 a.m. to 10 p.m. ET on Saturdays,
and between 6 p.m. and midnight on Sundays.

 

Plus, the online application process generally is speedy, generally taking just a few minutes to apply. And applicants are notified immediately if their request is approved.

Small business operators, also take note. While the IRS does offer business payment plans, if you file your taxes as a sole proprietor or independent contractor, apply for a payment plan as an individual, not business, taxpayer.

OK, you've decided Uncle Sam's tax collector is the best lender for you. Now you must decide which of the two main types of online payment plans best fits your owing situation.

Short-term payment plan: This IRS payment plan is for taxpayers who owe less than $100,000 in combined tax, penalties, and interest.

The payment period for a short-term plan is 180 days or less.

There's no fee for setting up a short-term plan, but interest and the late-payment penalty will continue to accrue.

Long-term payment plan: This plan also is known as an installment agreement. As both names indicate, you can pay off your tax debt over a longer period.

These monthly payments are possible if you tax owed is less than $50,000 in combined tax, penalties, and interest.

Since these longer-term plans are a bit more complicated, the IRS normally charges a $31 setup fee. However, lower-income taxpayers may qualify to have the fee waived or reimbursed.

And if you've filed your tax return on time, the late-payment penalty rate is reduced while an installment agreement is in effect. The late payment penalty accrues at the rate of 0.25 percent per month, instead of up to 1 percent per month.

Also, if your tax balance is more than $25,000, your installment plan will require you pay via direct debit automatic payments from your checking account, known as a Direct Debit Installment Agreement (DDIA).

Installment plans the old-school way: If you go the online payment plan route and discover that you don't qualify, you still might other options.

You can complete and submit Form 9465, Installment Agreement Request (image excerpt below). In this process, you also might be required to attach a completed Form 433-F, Collection Information Statements. These forms must be mailed to the IRS.

Form 9465_Installment Agreement Request

See more tax forms and more about them at Talking Tax Forms!

If you prefer to apply by phone, call toll-free (800) 829-1040, or the phone number on your bill or IRS notice.

Offer in Compromise: If you know you just won't be able to pay your tax bill in full, look into making an Offer in Compromise, or OIC. Here, the IRS will let qualifying taxpayers settle their tax bill for less than the full amount due.

On OIC is not a get-out-of-tax-debt-free (or pennies-on-the-dollar) card. You must make a realistic payment offer. The IRS' online Offer in Compromise Pre-Qualifier tool can help you determine your eligibility if you're interested in applying.

You do have to pay a $205 non-refundable OIC application fee. Again, this fee can be waived for individual low-income taxpayers.

Delayed collection: Where the IRS determines a taxpayer is unable to pay, it may delay collection until the individual's financial condition improves.

This status, officially known as being classified as currently not collectible, does not mean the debt goes away. It just means the IRS has determined you cannot afford to pay the debt at this time.

You also might be asked by the IRS to complete a Collection Information Statement (either the previously mentioned Form 433-F, Form 433-A, or Form 433-B), and provide proof of your financial status. These forms ask you to provide information about your assets and your monthly income and expenses.

Note, too, that even if the IRS does delay collection efforts, what you owe will increase. This is because penalties and interest are charged until your tax bill is paid in full.

If you receive an IRS tax due notice, you can request a payment delay by calling the phone number on the notice or by calling toll-free (800) 829-1040.

You also might find these items of interest:

 

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