Why is my tax refund less than I expected? Debt offsets
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You have options if you can't pay your tax bill in full

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You didn’t file a tax return on April 15 and you’re still avoiding the task because you owe more than you can pay.

That’s a terrible reason. You actually are making things worse.

Penalty and interest charges automatically started running as soon as your tax filing and nonpayment became delinquent on April 16.

So you need to act now, first by filing a return, and then by exploring ways to eventually pay Uncle Sam what you owe.

Failure to file and/or pay penalty costs: Even if you can't afford to immediately pay the full amount of taxes you owe, go ahead and file a tax return and pay as much as you can.

This will stop the non-filing penalty of 5 percent of your due tax, which is assessed separately from the nonpayment one.

In fact, you may even qualify for special penalty non-filing penalty relief. This first-time penalty abatement option is available if in the previous three years you filed and paid your taxes on time.

But if you’re not eligible for the filing abatement, you need to at least stop the failure-to-file charges by submitting your Form 1040.

And when you do that, pay any amount of due tax you can.

You’ll still be charged the failure-to-pay penalty of 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. But even a nominal payment amount will reduce those charges a bit.

More importantly, it will let the Internal Revenue Service know that you know you owe and that you’re working on meeting your obligations.

Then it’s time to figure out how to cover that remaining tax balance that you just can’t cover in one fell swoop. Here are some suggestions, starting with the Internal Revenue Service’s own tax payment arrangements.

IRS payment plan plusses: Going directly to the tax collector is, for some, a good idea. The Internal Revenue Service offers a variety of ways to pay over time.

Note though, that like any lender, the IRS charges interest, and persistent inflation has kept interest rates relatively high. Currently, the IRS charges 8 percent interest on owed taxes. That’s compounded daily.

The applicate IRS interest rate also is adjusted quarterly, meaning that it changes with the Federal Reserve Board interest moves. Many expect the Fed to lower rates later this year.

Another reason some go with the IRS as a lender is that when you request an agency-approved payment plan or installment agreement (IA), in most cases the IRS cannot issue a tax levy against you. The IRS' time to collect also is suspended or prolonged while an IA is pending.

Online payment plans: In keeping with its continuing digitalization of the tax process, 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 9 p.m. ET on Saturdays,
and between 6 p.m. to midnight on Sundays.

Plus, the online application process generally is speedy, usually taking just a few minutes to apply. 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.

You must pay the amount you owe in 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 the previously mentioned, IA or 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 if you apply online. Application by phone, mail, or in-person will cost you a $107 setup fee. However, lower-income taxpayers may qualify to have the fee waived or reimbursed.

Also, if your individual 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). The tax debt trigger for DDIA payments by businesses (other than sole proprietors or independent contractors) seeking a long-term plan is $10,000.

If your due tax balance under a long-term payment plan doesn’t trigger the DDIA, you can make other monthly payment arrangements. They include using Direct Pay to send the amount from a checking or savings account; paying enrolling in and paying via Electronic Federal Tax Payment System (EFTPS); or make your payments by check, money order, or debit/credit card.

These payment options, however, are more costly to initiate. They require a $130 set-up fee if you apply online. The fee goes to $225 if you apply by phone, mail, or in-person.

A low-income option is available, but it won’t do away with the set-up charges, only reduce them to $43 regardless of how you apply, although under certain circumstances the fee for these filers might be reimbursed.

Installment plans the old-school way: If you don’t qualify for an online installment plan application, the old-school route is still available.

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 Tax Forms 2024.

Get a loan: It never hurts to shop around, especially when money is involved. In doing so, some individuals might find they can get a private loan to cover their tax bills at a lower cost than the combination of interest, penalties, and fees the IRS must charge under federal law.

Offer in Compromise: If you know you just won't be able to pay your tax bill in full, and a payment plan doesn’t work for you, 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.

An 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.

If you qualify, use Form 656 to submit an OIC. More information can be found in the Form 656 booklet.

You will 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.

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 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, you guessed it, penalties and interest are charged until your tax bill is paid in full.

You also might find these items of interest:



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