Now that you have completed your tax return, you realize that you owe the IRS more money! This can be a very frustrating and intimidating experience. There are many questions that come up: What are your options? Can you send a check or cash? Can you pay by credit card – and is this a good idea? If you can’t pay, should you file for an extension? Can you make monthly payments?
Hopefully, after reading this you will understand all of the pros and cons, and also know what your best option will be.
First let’s consider the various penalties that can be assessed by the IRS:
Failure to File: As the name implies, this is the penalty for filing your return after the April 15 deadline. It is usually 5% of the unpaid taxes for each month or part of a month that a return is late, up to 25%!
Failure to Pay: If your tax bill isn’t paid in full by April 15, you will have to pay a failure-to-pay penalty of ½ of 1% of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can also be as much as 25% of your unpaid taxes!
Interest: Currently the interest rate for unpaid taxes is 4% compounded daily! Generally, interest is charged on any unpaid tax from the due date of the return until the date of payment.
So, as you can see, it is in your best interest (no pun intended) to pay your taxes in full by April 15th; and if you can’t, there are ways to reduce your interest and penalties.
Let’s look at a few scenarios and see what your options are:
I owe the IRS money, and I CAN afford to pay it by April 15th.
Since you have already prepared your tax return and you can afford to pay by the due date, your only concern is securely sending Uncle Sam your money. Here are a few tips provided directly by the IRS:
- Never send cash!
- If you file electronically, you can file and pay in a single step by authorizing an electronic funds withdrawal via tax preparation software or a tax professional.
- Whether you file a paper return or electronically, you can pay by phone or online using a credit or debit card.
- Electronic payment options provide an alternative to paying taxes or user fees by check or money order. You can make payments 24 hours a day, seven days a week. Visit IRS.gov and search e-pay, or refer to Publication 3611, e-File Electronic Payments for more details.
- If you itemize, you may be able to deduct the convenience fee charged for paying individual income taxes with a credit or debit card as a miscellaneous itemized deduction on Form 1040, Schedule A, Itemized Deductions. The deduction is subject to the 2 percent limit.
- Enclose your payment with your return but do not staple it to the form.
- If you pay by check or money order, make sure it is payable to the “United States Treasury.”
- Always provide your correct name, address, Social Security number listed first on the tax form, daytime telephone number, tax year and form number on the front of your check or money order.
- Complete and include Form 1040-V, Payment Voucher, when sending your payment to the IRS. This will help the IRS process your payment accurately and efficiently.
I owe the IRS money, I CAN’T afford to pay it by April 15th, but I can pay within 120 days.
If you fall into this second category, then requesting additional time to pay from the IRS (this can be from 30 days to 120 days) may be your best option. The IRS usually approves these 120-day extensions, but they reserve the right to deny your request if they feel as though you cannot pay the full amount within 120 days.
To apply you can use the Online Payment Agreement and, when approved, you should receive written confirmation from the IRS within 10 days.
By using this option, you can avoid the Failure to File penalty – the 5% per month discussed above.
I owe the IRS money, I CAN’T afford to pay it by April 15th, and I CAN’T pay it in full within 120 days.
If this is you, the prospect of interest and penalties being heaped on top of your tax burden must seem daunting. However, you have a couple of options to reduce the sting:
Installment Agreement: If your taxes, interest and penalties total less than $25,000 then you can use the Online Payment Agreement (OPA) and be automatically and immediately approved for an installment plan. If you owe more than $25,000 you must complete Form 9465 (PDF) as well as Form 433-F (PDF).
The fee for using this option is $105 ($52 if you make the payments by electronic funds withdrawal). You will still be responsible for paying interest on any outstanding amount while under the installment agreement. Also, you may be charged with the Failure to Pay penalty – depending on how much you were able to pay on of before April 15.
Pay by Credit Card: The IRS allows you to charge your taxes on your American Express, MasterCard, Visa or Discover credit cards. Also, they will accept your payment on your debit card, as long as it is branded as a Visa Consumer Debit Card, or a NYCE, Pulse or Star Debit Card.
Visit this link for a list of IRS approved service providers, in order to make a payment by credit or debit card. If you are paying by credit card, the service providers charge a convenience fee based on the amount you are paying. If you are paying by debit card, the service providers charge a flat fee of $3.89 to $3.95.
You will have to do some basic math to figure out if the interest, penalties and the fee for the installment agreement is more or less than the interest and convenience fee from using your credit card to pay your taxes. This will be heavily dependent on the amount of time you will need in order to pay your outstanding tax bill in full.
No matter which option you choose, it is clear that you should make sure to file your tax return (or request an extension) by April 15 in order to avoid the Failure to File penalty. Also, be sure to pay as much of your tax debt as possible by this date. It may pay to max out your card and pay the balance by using one of the other options listed above.
If you need to file for an extension, click here for more information.
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