While the majority of Americans get a tax refund each year, there are many who owe tax and some who can’t pay what they owe all at once. If you find yourself in the position of owing taxes, there are a number of ways to deal with the issue:
- Get a Loan to Pay the Balance – If you owe the IRS and don’t pay on time, they will assess interest and penalties. If you work out an installment payment agreement with the IRS, they will also charge you a user fee for setting up the agreement. The least expensive way to deal with the liability may be to get a loan and pay the liability in full with the loan proceeds. Whether it is a loan against your property or a loan from a family member, the cost will generally be far less than the interest, penalties and fee the IRS will charge.
- Credit card payments – You can pay your bill with a credit card. Although credit card interest rates are generally high, your card’s interest rate may be lower than the combination of interest and penalties charged by the IRS. However, the IRS itself does not accept credit cards; instead, there are three companies who can take your credit card charge and then remit your payment to the IRS. You will be required to pay a fee for this service. To pay by credit card, contact one of the following processing companies: Link2Gov at 888-PAY-1040 (or www.pay1040.com), RBS WorldPay, Inc. at 888-9PAY-TAX (or www.payUSAtax.com) or Official Payments Corporation at 888-UPAY-TAX (or www.officialpayments.com/fed).
- Installment Agreement – You may request an installment payment agreement if you cannot pay the liability in full. This is an agreement between you and the IRS to pay the amount due in monthly installment payments. You must first file all required returns and be current with estimated tax payments. Then IRS will continue to charge you interest on the unpaid balance and you will be required to pay a one-time user fee of $105. If you allow the IRS to take direct withdrawals from your bank account for the agreed-upon installment amount, the user fee is reduced to $52. For eligible individuals with lower incomes, the user fee can be reduced to $43.
The IRS is bound by a 10-year statute of limitation on collections – If you utilize the installment agreement, the statute of limitations is extended by the amount of time the installment agreement is in place.
If you owe $25,000 or less in combined tax, penalties and interest, you can request an installment agreement using the Online Payment Agreement application or you can apply by mail using Form 9465, Installment Agreement Request, along with your bill in the envelope you received from the IRS. The IRS will inform you (usually within 30 days) whether your request is approved, denied, or if additional information is needed.
You may still qualify for an installment agreement even if you owe more than $25,000, but you are required to complete a Form 433F, Collection Information Statement, before the IRS will consider an installment agreement. Once you enter into an installment agreement, you must keep your payments and any subsequent tax liability current. If you ended up owing on your last tax return, it may be appropriate for you to adjust your withholding or estimated tax payments.
- Cash-in Retirement Accounts – Tapping your retirement funds should be avoided at all costs. Not only are you jeopardizing your future retirement, money taken from an IRA or retirement fund generally will be taxable, and if you are younger than 59½ the taxable distribution also is subject to early withdrawal penalties ranging from 10 to 20%. If you reside in a state that has state income tax, the distribution may also be taxable to the state, plus state penalties may be owed.
It may be appropriate for you to make an appointment and come in for a meeting so together we can explore your various options for satisfying your unpaid tax liability with the least amount of cost. Please call for an appointment.