The IRS, though, has dealt with this dilemma many times before. It offers a few options and grace periods.
How Soon Can You Pay?
First, figure out how quickly you can pay off the tax debt. Paying it all at once will save you some money if you can come up with the cash. The IRS will continue to assess late payment penalties and interest up through the date you pay in full. The IRS charges interest at the rate of .5% of the amount you owe each month, up to a total of 25% of your tax debt.
If You Can Pay Within 45 Days
Can’t pay your tax bill in its entirety right now, but know that you’ll be able to do so within 45 days? Send in a partial payment using the Form 1040-V payment voucher when you file your tax return. Then wait for the IRS to send you a letter, known as the Notice of Tax Due and Demand for Payment. It will detail your outstanding balance and any late charges that have been added. The IRS usually provides a grace period of 21 days after sending that letter, to avoid additional interest and penalties. If payment is not received within 60 days, the agency can proceed with collection activity. Pay your remaining balance by the deadline set by the IRS if you possibly can.
If You Can Pay Within 120 Days
The process is similar if you can pay off the tax you owe within six months. Send in a partial payment using Form 1040-V, and then wait for the IRS to send you a letter telling you how much you owe, including interest and late charges. Next, call the IRS at the number shown on the letter. Request a short-term extension of time to pay beyond the date set in the letter. When you talk to an IRS representative, propose a definite deadline for paying off your balance in full. They will note that date in your records. Use the payment voucher that’s included with the letter to make your next and final payment. Calling the IRS is important with this payment tactic. It will prevent the agency from taking more aggressive collection actions. You’re letting the agency know that you’re on top of the situation and trying to fix it.
If You Need More Than 120 Days
Need a more significant time to pay off your debt? The IRS will usually let you set up a monthly payment plan called an “installment agreement.” This is a formal agreement to pay the IRS over time. The agency will likely approve your payment plan if it would pay off your tax debt in six years or less. Depending on how much you owe, you might also have to submit a financial statement. Streamlined installment agreement applications are available, though, for taxpayers who owe up to $50,000. The IRS does charge a fee to set up these plans. As of the 2020 tax year, it ranges from $31 to $225, depending on how you make your payment. There are options and reduced fees available to low-income taxpayers who qualify. This is a one-time fee that’s paid upfront. It is often part of your first payment. You can apply for an installment agreement on the IRS website if you owe $50,000 or less. You also can file your request on Form 9465. Your interest rate will drop to 0.25% if you commit to an installment agreement.
Temporarily Delay Collection
This option doesn’t come with a set date by which you can pay off the IRS. It’s available only if the IRS agrees that collecting from you at that point in time would present an undue financial hardship to you. Your tax debt doesn’t go away. It’s just put on hold until such time as your finances recover. You must be able to prove that you would not be able to meet your necessary living expenses if you were to pay the debt. The IRS will categorize your matter as “currently not collectible.” Penalties and interest will continue to accrue, however.
When You Can’t Pay Your Taxes at All
If you aren’t able to pay your taxes at all, it’s best to seek advice from a tax professional who’s authorized to represent you before the IRS. Typical examples are CPAs, attorneys, and enrolled agents. Many tax clinics provide free or low-cost access to tax professionals. That’s generally a good place to start if you need help. A competent tax professional can evaluate your options, which might include:
Temporary delayPartial payment planOffer in compromise
The Bottom Line
If you owe the IRS money, the worst thing you can do is to do nothing. The agency typically welcomes all overtures to get tax debts paid. It might even accept less than what you owe if your financial situation qualifies.
