Mother Lode Tax Tips

First off, if you know you will owe money to the IRS for your income tax but don’t have the funds to pay, you should still file your return by the deadline.  When you file, pay as much of the tax as you can afford at the time, that way you can avoid as much of the penalties and interest as possible.

There are many options available in which to pay the IRS your tax debt, whether you are paying in full or not.  Below is a list of those options as well as some information about when that particular option may apply:

Check:  The most common why to pay your IRS tax debt is with a personal check (or money order if you prefer).  If you paper file your tax return you can enclose your check, made out to the United States Treasury, when you mail your return.  If you electronically file your return, you should mail your check with Form 1040-V with which you can enclose with your check and mail to the IRS.  In both cases the IRS requests that you write the primary taxpayers social security number on the check as well as the tax year and tax type (i.e. Form 1040).

Credit or Debit Card: If you like, you can pay your IRS tax liability by credit or debit card.  There are two services recommended by the IRS:  Pay 1040.com and Official Payments; only Pay 1040.com will accept debit cards, but only from certain issuers.   Both services allow you to make online (or by phone), secure payments to the IRS (Official Payments service also allows you to make payments to some states, local governments, and even educational related payments).  They both charge a convenience fee for use of your credit card which is currently 2.49% of the amount of tax you pay.  For example, if you owe $100 in tax you would pay a convenience fee to the service (not the IRS) of $2.49.  If you use your debit card at Pay 1040.com there is a flat fee of $3.95, no matter what amount of tax you are paying.  Make sure when you use these services that you do not add the convenience fee to the amount of tax you are paying to the IRS, as these fees will automatically be charged to your card. 

Additional Time to Pay:  In some cases the IRS may extend a short amount of additional time (30 to 120 days) to pay your tax liabilities depending upon your circumstances.  However, you must be able to pay the tax liability in full by the extended due date.  By being granted an extended time to pay you will generally owe less in penalties and interest than in other types of payment extensions.  You can request the extension at the IRS by calling 800-829-1040 or by filling out the Online Payment Agreement Application.  In order to be granted an extended time to pay, in most cases, you must owe less than $25,000 in combined tax, penalties and interest.

Installment Agreement:  If you cannot pay the full amount of tax you owe within 120 days, and owe less than $25,000 in IRS tax liabilities, then you can request to pay your tax liabilities via an installment agreement using the Online Payment Agreement Application (or Form 9465).  If you owe more than $25,000 in tax liabilities and would like an Installment agreement you must contact the IRS directly (800-829-1040).  In order to qualify for an Installment Agreement you must have filed all due tax returns.  This method will allow you to pay your IRS tax liability over a period of time with monthly payments,  however, you may need to provide information about your income and expenses to determine the monthly payment you can afford (a payment calculator is provide as part of the application process).   You must be able to pay the tax liability in full before the IRS collection statute on your tax liability expires.    There is a $105 user fee that will be added to your tax liability due, and of course, interest will accrue on any amounts due until paid in full.  Once an installment agreement is approved by the IRS you can make your payments either by check, direct debit, or via credit card as mentioned above.

Partial Payment Installment Agreement:  In some cases (although rare) the IRS may allow you to make installment payments that will not pay off the tax liability in full before the IRS collection statue expires.  This type of agreement cannot be requested, as the determination is solely made by the IRS.  If the IRS determines that you may qualify for this type of installment plan you will be requested to provide accurate financial information that will be reviewed and verified by the IRS.  Also, any equity in assets that exist may first be used to reduce the tax liability, and a review will be made every two years in which payment adjustments can be made or the agreement terminated.

Offer in Compromise:  Another option where you may not need to pay the full amount of tax due is an Offer in Compromise, which is an agreement between you and the IRS to pay your tax liabilities for less that the full amount due.  Typically the IRS will only accept an Offer in Compromise if they believe that you cannot pay the whole tax due in a lump sum or that you have the ability to pay the full tax liability through a payment agreement.  In most cases the IRS will not accept an Offer than is less than the amount that they feel they can reasonably collect.  The grounds that the IRS may accept an Offer is based on these three factors:  Doubt as to whether the full tax liability can be collected, doubt as to the actual tax liability, and Fair tax administration; will this tax cause an undue hardship or unfairness.  A Compromise can be paid with any of these three methods: Lump sum cash offer, short term periodic payments (24 months or less), and deferred periodic payments (over the remaining statutory collection period).  An application fee of $150 is due with the Form 656 Offer in Compromise and payment must be made with the Offer and continue to be made while the Offer is being considered by the IRS.  Failure to make a required payment will result in the Offer being declared withdrawn.

For additional information on IRS tax payment options visit these links:

• IRS Electronic Payment Options
• The Installment Payment Process
• Offer in Compromise Payment Options

Tags: IRS, Payment, Tax

This entry was posted by Richard Rogers, EA on Monday, September 21st, 2009 at 9:00 am and is filed under For Individuals, Payment. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.