Sigh! Another Tax Day has come and gone. We hope you at least filed or asked for an extension on time. But what's this? You can't make your IRS payment?
Take a deep breath and relax. We’ve got you. Here’s what to do when you can’t make your tax payment when you file.
Tax Day 2022
The IRS gave everyone a break and put Tax Day on April 18 this year. You had three extra days to finish your taxes while the Easter Bunny hopped around the house. Then, when you got your return completed, the number on the bottom line said you owed more money than you could pay right now.
You aren’t alone. About 5 million taxpayers need a payment alternative every year. The best way to start is to file on time because the penalty for late filing is higher than the penalty for late payments. The good thing is that you don’t need to pay all at once.
File on time, pay a good-faith amount on time, and then you can set up a payment plan or other alternative for the rest. Just understand that the outstanding balance will accrue interest until it’s paid off. Currently, the interest rate from April 1 to June 30, 2022, is 4% compounded daily.
The IRS accepts all kinds of payments. If you need to make even a partial payment, you can use your debit card instead of sending a paper check. Or you can allow the IRS to make a direct debit withdrawal from your bank account.
The IRS also accepts credit card payments. You could place your tax debt on your credit card (at least up to your credit limit) and then pay the credit card off. Since the federal government accepts the payment, they make you pay the credit card fees, which are around 2% to 4% of the total. So that could be an option.
Find a zero percent interest credit card, so you don't have interest building on what you now owe the credit card company. You also bypass paying the IRS interest and penalties on your tax balance, so you save a little money this way.
Other alternatives for immediate payment include obtaining a personal loan or a home equity line of credit (HELOC). The IRS will be satisfied, and you just pay off the loan as soon as you can. Do your research to see if this works for you. Interest rates on personal loans fluctuate and may be higher than the interest and penalties you would owe the IRS.
Do you need more than 180 days to pay the amount? Then it’s time to consider an installment plan, which we discuss below. Some plans are pretty straightforward, and you can enroll online. Other plans are a bit more complicated and require some documentation.
Can you prove financial hardship? If you can’t pay right now but can pay later, you can be classified as Currently Not Collectible (CNC). The IRS won’t ask you to pay until your circumstances have improved.
Finally, it’s difficult, but you may be able to get an Offer in Compromise settlement. You do a deal with the IRS and pay less than your balance owed. However, you must qualify, and it isn’t easy. Most taxpayers using an Offer in Compromise have few to no assets and are unable to pay necessary living expenses.
Online Payment Plans
Do you owe less than $100,000 in combined taxes, penalties, and interest? You qualify for a short-term payment plan, giving you up to 180 days to pay your taxes in full.
- Set it up online with no setup fee
- You accrue interest on the balance until it’s paid in full
- The penalty for non-payment maxes out at 25% of the unpaid amount until paid in full
Do you owe less than $50,000 of combined tax, penalties, and interest? You qualify for a long-term payment plan, giving you more than 180 days to pay.
There is a setup fee based on your income. You have a couple of options for payment.
Option A allows you to make monthly automatic withdrawals.
- There is a $31 setup fee unless you qualify as low-income, then it’s a free setup
- Pay via a Direct Debit Installment Agreement (DDIA) from your checking account (required for this plan).
- Your balance accrues interest until it’s paid off.
Option B is a non-direct debit plan, meaning you aren’t required to set up a direct debit agreement. This plan costs more in fees.
- There is a $130 setup fee unless you qualify as low-income, then you pay $43, which is reimbursable if you meet specific requirements.
- You accrue interest on the balance until it’s paid in full.
- The penalty for non-payment maxes out at 25% of the balance owed until it’s paid in full.
You can pay using an automated (non-direct) direct payment from your checking or savings account. You can pay with a check, money order, or debit card. Also, you can pay with a credit card, but you are required to pay any applicable transaction fees.
The IRS offers installment agreements. Submit Form 9645 Installment Agreement Request and pay the setup fee based on your income. The perk of these plans is that the ten-year collection period is suspended, meaning the IRS won’t initiate collection activities against you.
The request often remains pending until it can be reviewed, and the IRS establishes the request as withdrawn or rejected. If the installment agreement is rejected, the collection period is suspended for 30 days, then the IRS initiates collection activities.
If the IRS agrees to the installment plan and you default on the monthly payments, the IRS can propose to terminate the agreement and suspend the collection period for 30 days. If you exercise your right to appeal an installment agreement rejection or termination, the collection period is suspended for the time the appeal is pending until the appeal becomes final.
Now You’re All Set
Now that you have your heart rate under control and understand you have several options to make payments on your tax balance, you can get things rolling. Decide which plan works for you and get things going ASAP. That interest isn’t going to pay itself!
If you need help with any of this (or a shoulder to cry on), contact the Top Tax Defenders team. We can keep the IRS off your back so you can pay in peace.