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Do you owe the Internal Revenue Service, but don’t have the money to cover your full bill? One of the various installment payment plans offered by Uncle Sam’s tax collector could be the answer. Really!
You finished your tax return and the final tally is not good. You owe. A lot.
And you don’t have the cash or credit limit to cover your final tax bill.
Even though the Internal Revenue Service right now is at the bottom of your where to turn for help list, the agency just might have an answer to your tax payment problem.
It offers a variety of extended payment options, one of which could be a fit for you.
File, even if you can’t pay: First things first. Even if you can’t pay all or even any of what you owe, file a tax return or Form 4868 to get a six-month extension to file.
Either will at least prevent you facing the penalty for not filing.
Yes, the non-filing penalty is a separate one from the nonpayment penalty. And the assessments for not sending in a return are actually are stiffer than those for not paying the bill that’s shown on your Form 1040.
The failure-to-file penalty typically is 5 percent of the tax owed. It’s assessed each month (or part thereof) that your return is overdue, and maxes out at 25 percent of the unpaid tax bill.
The fail-to-pay penalty is one-half of one percent (0.5 percent) for each month, or part of a month, again up to a maximum of 25 percent of the amount of tax that remains unpaid.
And don’t forget about the interest. The current interest rate for April through June is 6 percent per year, compounded daily. The interest rates are adjusted quarterly.
Given the inflation expected in the wake of U.S./Israel/Iran war (or whatever euphemism you want to use), the interest rate is likely to increase.
Pay any amount you can: If you can’t pay your full tax bill, the IRS is happy to take a partial payment. That payment should be made with your Form 1040 or Form 4868 filing.
It’s not the optimal solution, but it can reduce the total amount you’ll owe. Penalty and interest charges will still accrue on the remaining balance.
So, paying something will at least reduce the total due that the IRS uses to calculate its added charges. That will mean your overall penalty and interest assessments will be a bit less.
Okay, you can’t cover your federal tax bill in full on April 15. Then it’s time to look at payment options.
Your specific tax situation will determine which over-time payment options are available to you. They include a short-term payment plan or a long-term payment plan, also called an installment agreement.
Short-term payment plan: If you’re just a bit short of cash now, but expect to have the money needed to pay your tax bill soon, consider the short-term payment option.
You can use this plan, available only to individual taxpayers, when your total tax balance is less than $100,000 in combined tax, penalties, and interest.
As the name indicates, you have a limited time to pay your tax bill in full. Specifically, 180 days.
You can make the payments directly from a checking or savings account using IRS’ Direct Pay.
You also can pay electronically online through your IRS account, which you’ll need to apply online for the short-term payment plan.
If you already had an Electronic Federal Tax Payment System (EFTPS) account, you can use it to remit payments in your short-term payment plan. But note that the IRS plans to shut down EFTPS later this year, so you might want to switch to an individual taxpayer account.
There’s no fee to set up a short-term payment plan. But penalties and interest will accrue penalties and interest until the balance is paid in full.
Direct Debit installment agreement: If you need more time to pay your tax bill, check into a simple payment plan. This option, which also is referred to as long-term or installment plan, is available if you owe $50,000 or less in combined tax, penalties and interest.
You also have a choice of two payment options with an installment plan.
The first is to pay your tax bill via Direct Debit automatic monthly payments from your checking account. This payment option, known as a Direct Debit Installment Agreement (DDIA), benefits both you, the owing taxpayer, and the IRS.
Automatic bank withdrawal means you don’t have to mess with sending the IRS a payment each month and saves postage costs. It also reduces the chance of defaulting on the plan, which is good news for you and the U.S. Treasury.
The fee to set up a DDIA varies depending on how you create it. The most economical way is to apply online. A DDIA establish this way will cost you $22. If, however, you prefer to apply by phone, mail, or in person, the set-up fee balloons to $107.
Lower-income taxpayers might qualify for a reduced fee to establish a tax installment agreement. Details can be found in IRS Form 13844, Application for Reduced User Fee for Installment Agreements. IRS.gov also has more information on the waiver or reimbursement of the installment payment plan user fee for qualifying individuals.
As with the short-term plan, penalty and interest charges will continue to add up under a DDIA until your balance is paid in full.
Simple long-term payment plan: The second long-term tax installment plan option, or a simple payment plan as the IRS calls it, offers you additional ways to pay off your tax debt.
Here you can pay monthly via —
- Direct Pay straight from a checking or savings account;
- An electronic online payment through your IRS account or by phone using EFTPS (which, again is being eliminated this year);
- A mailed paper check or money order; or
- Using a debit or credit card, which also will produce fees collected by your card issuer.
Speaking of fees, the set-up cost for a long-term plan in which you use options other than Direct Debit are $69 if you establish the plan online, or $178 to create it by phone, mail, or in person.
Qualifying lower-income taxpayers who apply online for a long-term simple installment plan, or do so by phone or in-person, will face a $43 setup fee. That amount, however, may be reimbursed if certain conditions are met.
Your installment payment plan term can be as long as 10 years, which is the length of the IRS collection statute. Remember, though, that the longer the payment period you choose, the more interest and penalties you will owe.
The IRS provides guidance at its online payment plan application page, as well as in its collection of additional information on payment plans.
Regardless of which payment plan fits your tax debt needs, act quickly. Setting up an arrangement as soon as possible will help reduce penalty and interest charges.
You also might find these items of interest:
- IRS revises online withholding tool to account for new tax laws
- Tax law changes highlight the importance of professional tax help
- Filing Form 4868 will give you more time to file your taxes, but you must pay what you owe
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