When the tax you owe is more than the money you have available to pay, your first instinct may be to panic – but don’t. You have options for paying your taxes even if you don’t have the cash to pay in full by April 15th. There are many reasons why you might owe the IRS more than expected; the most common involve making more money and finding yourself in a higher tax bracket or not having enough money withheld from your paycheck. Whatever the reason, if you owe the IRS more than you can afford you need to do something about it.
If you don’t pay taxes you owe, eventually, the IRS will take collection action, and you definitely don’t want to deal with that situation. The IRS has the power to garnish your wages, social security benefits, bank account, and even retirement income to recover the money you owe for federal taxes. They can also take and sell your car, real estate, or boat to satisfy your tax debt. Future tax refunds, including both federal and state tax, can be seized and applied to your federal tax liability.
The bottom line is the IRS won’t just go away if you ignore them, so take your head out of the sand and try one of the following solutions if you can’t pay the IRS:
File Your Taxes on Time Even if you Can’t Pay
In an ideal world, you would pay for any taxes owed when you file – but you wouldn’t be reading this article if that was an option. Even if you can’t pay the IRS right now, file your taxes on time. Filing late hoping to come up with the money means the IRS is going to tack on a late filing penalty in addition to your late payment penalty and interest charges.
Pay as much of your total tax bill as possible when you file, but even if you can’t send a dime – file your taxes on time! You’ll get charged late payment penalties and daily interest even if you request a tax return filing extension.
Set Up an Installment Plan With the IRS Online Payment Agreement Tool
(watch video to learn about available IRS payment options: https://www.irsvideos.gov/OweTaxes/)
Don’t wait for the IRS to send a bill for your total taxes before you ask to set up an installment plan. You can use the Online Payment Agreement tool on the IRS website to request a payment plan after you file your taxes, as long as you meet the following criteria:
- Individuals must owe less than $50,000 and have filed all required tax returns
- Businesses must owe $25,000 or less in payroll taxes and have filed all required tax returns
If you are not eligible for the online payment agreement, you can still request a payment plan by filing Form 9465 when you send in your tax return.
When you set up an installment agreement you have the option to set up a direct debit agreement, so you don’t have to worry about writing and mailing a check each month. If you prefer to make the payment manually, you could also send it securely online by logging into IRS.gov/directpay.
When figuring out what your monthly payment should be, make sure you can afford the amount to avoid falling behind or going into default. Paying IRS installment agreements late or not at all results in additional penalties and fees. If you think you can easily afford $200 per month but the minimum required monthly payment is $85, commit to the minimum amount and then just pay more every month that you can. This will save you from paying additional fees and penalties if there is ever a month you are unable to pay the full $200 you expected to be able to pay.
There are set up fees for creating an installment payment plan with the IRS. If your request for a payment plan is approved, the following fees are added to your tax bill:
- $52 if you set up a direct debit agreement to make monthly payments
- $120 for payment agreements that are not automatically debited from your bank account
- $43 if you meet low income requirements
- No set up fee if you are setting up a short term agreement of 120 days or less
Consider Financing Your IRS Bill
Is your inability to pay your taxes just an issue of timing? Maybe you have money in an account someplace, or you have money on the way, but you don’t have access to it until after April 15th. If this is the case, consider paying your IRS bill with a credit card or a loan. The interest and fees for the loan or credit card bill will probably be less than the penalties and interest charged by the IRS, especially if you have the ability to pay the loan or credit card in full soon after you make the payment.
Be sure to weigh the pros and cons before using either of these methods to take care of your tax bill.
Ask the IRS for Help
The IRS can be intimidating due to their ability to take your assets or wages to recover your debt, especially when you know you owe them more than you can afford to pay. You might be surprised to learn that calling the IRS is actually quite painless! The people who answer the phone are there to help you, and can talk you through your options for paying your taxes, set up installment agreements over the phone, and assist you if you already have back taxes from a previous year with an installment plan but need to add your newest tax liability to the plan. Give the IRS a call at 1-800-829-1040 and ask for help – sometimes they can give you a few extra months to pay (sometimes even without penalty if you’ve never paid late before). The goal of the IRS is to collect taxes you owe, and they will work with you most of the time as long as you communicate the situation with them.
Debbie is a writer who specializes in parental finances, consumer spending and mortgages.