In case you haven’t done so already, go ahead and file your income tax return. April 17th is quickly approaching and the IRS will want its money. Even if you don’t have the money to pay your full tax bill, make sure that you file your income tax return, or ask for an extension by April 17th. The absolute worst thing that you can do is to simply neglect paying your taxes. The IRS has stiff penalties for those who simply do not file.
By filing on time, you will avoid the IRS’s 5% monthly “failure-to-file” penalty. For each month that you don’t file, you will be charged 5% of your total tax obligation, up to a staggering 25%. After that, you will face a “failure-to-pay” penalty of 0.5% each month for the remainder of your tax balance.
If you do end up owing Uncle Sam some money, you’re in luck. The IRS offers a number of payment options for those who are unable to pay their entire tax bill at once.
Pay by Credit Card
Believe it or not, you can pay your tax bill with your credit card. The IRS has awarded two companies, Link2Gov Corp. and Official Payments Corp., with contracts to accept credit card payments on their behalf. Thru these two companies, you can pay your tax bill using your Visa, American Express, MasterCard, or Discover credit card. Both companies accept paper and electronic filers via phone or the internet.
Although paying with your credit card might seem ideal, you must be aware. The service does come with a price. Generally, these companies charge 2.49% of your entire tax bill or a minimum of $1, which ever is greater. If your entire tax bill was $3,400, expect to pay an extra $84 in fees.
When paying with your credit card, make sure that you can pay off your credit card bill in a timely matter. The longer you hold on to the balance on your credit card, the more you will end up paying in interest charges.
Start a Payment Plan
If your tax bill is greater than your credit card’s available credit, you can make monthly payments to Uncle Sam. The IRS will give you up to three years to pay off your entire tax bill as long as you don’t have any previous balances. On top of that, they will even allow you to choose your payment day and the payment amount. To enroll in the installment program, attach form 9465, Installment Agreement Request, to the front of your tax return.
Negotiate a Deal
When all else fails; you can’t pay with a credit card, or with a payment plan, it is time to play lets make a deal with Uncle Sam by making an Offer in Compromise or an OIC. An OIC is basically a lump sum payment lower than your original bill. The IRS offers OIC in hopes of getting some type of tax payer money sooner rather than after costly collection attempts.
Remember, negotiating an OIC with the IRS should be your last alternative. If you think that an OIC will simply get your tax bill reduced, think again. Not everyone who applies for an OIC will be approved. To even be considered, you must prove that you have no possible way of paying your entire tax bill. The IRS reviews your financial situation and future potential income to determine whether you have a reasonable payment offer.
If you believe that you may qualify for an OIC, you will need to file two separate forms: Form 433-A, Collection Information Statement and Form 656, Offer in Compromise. Along with these forms, you will also have to submit a $150 application fee along with Form 656-A, Offer in Compromise Application Fee Instruction and Certification.
This fee is waived for people who have little or no income if the claim a poverty exception when filing form 656-A. Make sure that you send in the application fee with your payment, if you don’t the IRS has the right to deny your application. If everything is submitted as required, there is still a possibility that you won’t get accepted for an OIC. If you aren’t accepted, you simply lose your $150 application fee. If you are accepted, the $150 go toward your tax bill.
Owing Uncle Sam a little bit of money once April 17th rolls around isn’t terrible. There are many options available to pay your IRS bill if you ever end up owing. The worst thing that you can do to yourself and Uncle Sam is not pay. By not paying, you will only worry yourself and accumulate more debt.