There are few things more stressful than owing money to the Internal Revenue Service (IRS). If your tax obligation exceeds your cash on hand, this becomes even more difficult to cope with. Fortunately, depending on your unique situation, you have a few choices for paying down your tax burden. The Internal Revenue Service (IRS) provides several payment alternatives.
Key Takeaways
- To avoid penalties and interest being added to your tax burden, file and pay on time as much as feasible.
- If you can't pay your tax bill immediately, you can apply for an installment agreement or a short-term payment plan.
- If you get into an installment arrangement with the IRS, you must make minimum monthly payments until your tax liability is paid in full.
- You may be able to request an offer in compromise or a postponement until a later date if you are unable to make your monthly payments.
Address Your Tax Situation on Time
It will quickly become out of control if you ignore your tax debt. The IRS will add penalties and interest to your outstanding sum if you do not pay on time. The monthly interest is calculated by multiplying the federal short-term rate by 3%. If you don't pay your taxes on time, you'll be charged a monthly penalty of 0.5 percent of your tax obligation. Other penalties, especially if you fail to file your taxes, might be applied at an even greater rate. These sums can quickly build up, putting a significant additional hardship on top of the taxes you already owe. The IRS can levy and lien your income and property if you don't pay your taxes for a long time.Set Up an Installment Agreement
If you owe less than $50,000 in taxes, you can set up an installment plan with the IRS. This allows you to pay your taxes in monthly installments without incurring additional fines. An installment arrangement allows you to pay your tax bill for up to 72 months. A payment plan comes with setup fees, sometimes waived for low-income taxpayers. Before approving your installment agreement, the IRS may consider other options, such as selling or borrowing against other assets. If your tax debt exceeds $10,000 and you haven't missed a payment in the previous year, you may be eligible for a guaranteed installment arrangement. You can also set up a short-term payment plan if you owe more than you can pay. You now have 180 days to pay your taxes. Because you will be paying down a portion of the balance each month, you will pay less interest than you would otherwise. However, fewer penalties will be added to your total. Even if you set up an installment agreement or a short-term payment plan, you'll have to pay monthly interest until the loan is paid off completely.Making Minimum Payments
You must be able to make a minimum monthly payment equal to your entire tax obligation divided by 72 months to qualify for the installment arrangement. You can always pay more in a given month than you agreed, but you can never pay less. The IRS will send you a notice with the amount you owe and the due date each month. You can also set up a direct debit from a bank account, in which case the money will be taken out automatically, and you will not be notified. Create an installment plan for the smallest amount the IRS will accept. Then, if you have additional money, you can always pay more in some months to pay off your tax burden faster. If you can't afford the minimum payment, you'll need to contact the IRS to establish a different payment plan. Rather than applying online, you must send Form 9465. The IRS will examine your finances to determine whether or not to alter your agreement, including:- If you sold your assets, how much money could you come up with to satisfy your tax debt?
- Do you have any credit available?
- Is it possible to pay the IRS with a credit card or a home equity loan?
- After paying your essential living expenditures, how much money do you have each month?
- Food, groceries, clothing, cleaning supplies, and personal care products
- Rent, mortgage payments, property taxes, and homeowner's or renter's insurance, as well as telephone service, trash, water, gas, electric, propane, some cable television, and internet service
- Payments for cars, gasoline, oil changes, maintenance and repairs, auto insurance, and public transportation charges such as bus passes, train fares, and other forms of mass transit
- Premiums for health insurance and out-of-pocket medical expenses
- Childminding
- Premiums for term life insurance
- Tax payments and withholding estimates for the current tax year
- Payments in installments for unpaid state and municipal taxes
- Any other expenses that can be demonstrated to be required for one's health, welfare, or income production
Determining Collection Financial Standards
The IRS will expect you to pay a monthly tax based on the money you have left over after paying your basic living expenditures. To make these computations, fill out IRS Form 433-A or Form 433-F, but remember that the IRS may not authorize all of your expenses. It can dismiss a superfluous or out-of-the-ordinary expense. —The IRS will compare your actual expenditure to regional averages to account for the fact that some places have higher living costs than others. The term "collection financial standards" refers to these spending averages. The IRS will assume that you are only required to spend up to the amount outlined in the collection financial requirements. Anything above and beyond that is deemed discretionary rather than necessary. Your mortgage, for example, could be $3,000 per month. However, if the local threshold is merely $1,500, the IRS will almost certainly deduct $1,500 from your monthly disposable income estimate.Other Options for Paying Your Tax Debt
If the IRS refuses to accept the amount you believe you can afford, you may have a few additional options. You might want to think about:- Assets are being sold to raise funds for tax payments.
- Requesting an offer in compromise is a request to pay the IRS a lower amount than what is owed.
- Request a postponement, so you are not obligated to pay until your financial condition improves.
