There are few things in life more disappointing than finishing your income taxes only to discover not only are you not getting a refund – but you owe the IRS. If you owe the IRS more than you can afford to pay, don’t panic! There are a variety of options for people who can’t pay their taxes on time; you just need to pick the one that fits your situation:
File Your Return on Time
Even if you know you don’t have enough money available to pay for your taxes by the filing deadline, you still need to send in your return by the due date. The penalty for filing your taxes late is expensive, so no matter what the financial situation – file your tax return on time. If you can pay your taxes within a couple weeks of filing, just wait for the IRS to send you a letter stating how much you owe and the interest charges after filing, and take care of your taxes a few weeks after filing your income tax return. If you are unable to pay for your taxes in full, you will need to make arrangements.
Review Your Options for Coming Up With the Money
Before you throw your hands up and say you can’t afford your tax bill, take a close look at all of your possible resources for paying your taxes. Do you have a whole life insurance policy with cash value you could take and pay for your taxes? Do you have equity in your home that you could use? Maybe you could cash in paid time off at work instead of taking the days off. Review all of your options before making a decision, as some methods of coming up with money to pay for your taxes will be better than others.
Pay for Taxes with a Credit Card
If you have room on a credit card you might consider paying your taxes with credit. There are definite advantages and disadvantages to consider with this method of payment, but it may be the best option to pay for your taxes under certain situations. If you are going to use a credit card to pay for your taxes, try to use one with a low interest rate and a good rewards program.
The IRS doesn’t cover the credit card processing costs, so you’ll have to pay the fee along with your balance. The processing fee ranges from 2.35% to 4%, depending on the third-party payment provider you choose.
Pay for Taxes with a Payment Plan
The IRS offers taxpayers a way to pay your taxes over time with an installment plan if you are unable to pay for it all at once. You can either send in checks each month, or you can set up an automatic payment from your bank account with a direct debit. Use IRS Form 9465 to set up an installment plan and pay for your taxes in smaller, more affordable payments.
There is a $105 fee to set up an IRS Installment Plan, which is reduced to $52 if you set up direct debit for payments. There is interest charged on installment plans, but it is quite a bit lower than the average interest rate charged by credit cards.
Still Can’t Pay Your Taxes? Ask for an Offer in Compromise
If you are in a really tough financial situation and can’t make payments on the installment plan, don’t have room on a credit card, and can’t access the money from any other source – you might contact the IRS about an Offer in Compromise.
With an Offer in Compromise, you can offer a one-time payment or fixed payments in a short period of time, and generally for less than the total amount owed. It will only be accepted in extreme situations. To apply, you need to fill out IRS Form 656 and pay the $150 application fee. Not all offers will be accepted.
Simon Zhen is a research analyst for MyBankTracker. He is an expert on consumer banking products, bank innovations, and financial technology.
Simon has contributed and/or been quoted in major publications and outlets including Consumer Reports, American Banker, Yahoo Finance, U.S. News – World Report, The Huffington Post, Business Insider, Lifehacker, and AOL.com.