Tax season comes and you find yourself owing the government rather than getting a refund. Perhaps you owe more money to the U.S. government than you can afford. You're not alone, and many people have been there. The process can be intimidating, especially if you owe the government thousands of dollars. This guide will show you how to figure out how much you owe the government, the different ways of paying off your tax debt, and minimize interest and penalties.
How Much Do I OWe The IRS?
Keep in mind, just because you receive a notice or letter from the IRS that says you owe them money, it doesn't always mean that it's correct. The IRS can and has made mistakes in the past. Contact the IRS anyway, just in case by calling the toll free number on your notice or letter.
You won't know exactly how much you owe until you complete your tax return. Be sure to go over your tax return thoroughly before you submit it. Double check it to make sure you do, in fact, owe the IRS. You may have forgotten to add a crucial deduction that could tip the scales in your favor. Just missing one checkbox or question could cause you to lose out on a tax deduction or credit you were entitled to. Another good way to double check your return is to compare it to a return from the previous year, especially if your tax situation hasn't changed from that year. If your current tax bill is different, you should definitely look into this discrepancy before you submit your return.
If you're an individual taxpayer, you can use the IRS' tool to see:
- Your payoff amount that is updated for the current day.
- Balance for every tax year for which you owe
- Payment History
- Important information regarding your current tax return.
Clicking on "Create or View Your Account" will be your first step to gaining access to the above information.
If you're a business or individual tax payer who filed a tax form other than a 1040, you can submit Form 4506-T, Request for Transcript of Tax Return to get a transcript of your taxes.
If you're an individual taxpayers who filed a Form 1040, 1040A or 1040EZ, you can request an Account Transcript. Please note that it will only show a single tax year and may not show your most recent interest, penalties or changes. You can get your tax transcript by clicking the "Get Transcript Online" button on the IRS' page.
If you're still not able to get the facts that you need. You can always call the IRS directly, and an agent will assist you. Remember, call wait times can be lengthy, depending on the time of year.
7 a.m. to 7 p.m. local time
7 a.m. to 7 p.m. local time
Paying Your Taxes
You can pay off what you owe to the IRS in many ways. You can do it electronically, and physically. Here are some ways to pay off what you owe:
Direct pay (Bank Account)
You can use what the IRS calls Direct Pay. On this page, you can pay what you owe in taxes electronically by clicking the "Make Payment" button, as well as look up your payment history by clicking the "Look Up Payment" button.
Electronic Federal Tax Payment System is a good option for businesses, those making larger payments, and for those making estimated tax payments. Enrollment is required.
You can pay via the internet, over the phone, or mobile device. You can do this if you e-file, paper file or in response to a notice or bill. The IRS' debit/credit page has three different options at the bottom of the page. Processing fees do apply to debit/credit payments.
You can make these payments over the phone by calling:
Electronic Funds Withdrawal During E-Filing
Electronic funds withdrawal only applies to taxpayers who are using a tax preparation software, or are going through a tax professional. This is a direct debit from your bank account.
Same-day wire is when you wire the money to the IRS from your financial institution. You should download the Same-Day Taxpayer Worksheet, complete it and take it to your financial institution if you are paying on one or more tax forms or periods. You must complete a separate sheet for each instance.
Check or Money order
You can pay your taxes by check or money order. Both check and money order must be made payable to U.S. Treasury. You must include your name, daytime phone number, Social Security number or employer ID number, tax year, and related tax form or notice number with your check or money order.
Cash at a retail partner
You can pay your taxes in cash at a specified retail store. Although, this takes more steps to accomplish than the previous payment methods.
- Visit the Official Payments Site and follow the instructions to pay cash with PayNearMe.
- Once you get an email from Official Payments. The IRS will verify your information which could take up to 3 days to process.
- After you information is verified, you'll receive an email from PayNearMe, giving you a link to your payment code.
- You'll go to the retail store that is listed in the PayNearMe email. The clerk will scan or enter your payment code at the location. You can then pay in cash. It usually takes two business days to process.
What If I'm Unable To Pay My Taxes?
So you've confirmed that you owe the IRS and the amount owed, but you're not able to pay off the balance all at once. Rest assured, the IRS will work with you to make it happen. Just don't avoid the bill or you will suffer penalties and interest that will only increase your tax burden in the long run. You can pay off the balance in monthly installments, seek an Offer in Compromise, or temporarily delay the collection process.
You can meet your tax obligation with monthly installments. You can apply for a payment plan online to pay off your balance over an agreed period of time. Once you fill out and submit your online application, you will quickly receive notification of whether or not your payment plan was approved. Your payment options will depend on your specific tax situation. These payment options may include a short-term payment plan for 120 days or less, or a long-term payment plan (installment Agreement) for more than 120 days. For those who are independent contractors, apply as an individual tax payer.
- Long-term payment plan, aka Installment Agreement: You owe less than $50,000 in combined taxes, including penalties and interest. You also filed all required returns.
- Short-term payment plan: You owe less than $100,000 in combined taxes, including penalties and interest.
Making Payments on your Installment Plan
If you're approved for a payment plan, the IRS may charge you a setup fee, depending on the type of plan you choose.
If you choose a short-term payment plan, there is a $0 setup fee. You can make your payments through your checking or savings account, which is called Direct pay. You can also pay by check, money order or debit/credit card. Fees will apply if you pay by card.
If you choose a long-term payment plan (installment agreement), there will be a $31 setup fee, unless you get a waiver for low income. This is called the Direct Debit Installment Agreement (DDIA). If you decide not to use DDIA, then there will be a $149 setup fee. This can be waived down to $43 if you qualify for the low income waiver.
You can review and revise your payment plan by using the Online Payment Agreement Tool.
You can apply over the phone by calling. 800-829-1040 for individuals, and 800-829-4933 for businesses.
Offer In Compromise
Qualified taxpayers can apply for an Offer in Compromise. This allows you to settle your tax debt for less than the full amount that was owed. This is a solid option for those who can't fully pay their tax liability, or would be put into financial hardship because of it. The IRS will consider you for an Offer in Compromise under these circumstances:
- Your ability to pay.
- Your Income.
- Expenses and asset equity.
The IRS approves an Offer in Compromise when the amount offered represents the most they can expect to collect from you within a reasonable period of time. You should look into other payment options before applying for this though. Newly filed Offer in Comprise applications will be returned if you, the taxpayer hasn't filed all required tax returns and have not made any required estimated payments. If there is an extension on file with the IRS, this policy will not apply to the current year tax returns. Also, you're not eligible if you are in an open bankruptcy proceeding.
You can use the IRS' Offer In Compromise Pre-Qualifier to confirm whether you're eligible or not, and prepare a preliminary proposal.
Submitting your offer
The Form 656 Booklet will give you step-by-step instructions and all of the required forms for submitting an Offer in Compromise. Forms included are:
- Form 433-A for Individuals or 433-B for businesses
- Form 656 for individual or business tax debt
- $205 non-refundable application fee
- Lump Sum Cash: You can submit an initial payment of 20 percent of the total offer with your application. If the application is accepted, you'll receive confirmation from the IRS. The remaining balance on the offer will then have to be paid in five or fewer payments.
- Periodic Payments: You submit your initial payment with your application. You can continue to pay off the remaining balance in monthly installments while the IRS considers your offer. Once accepted, you can continue to make monthly payments until it is all paid off.
For individuals who meet the Low Income Certification guidelines, they are not required to pay an application fee or send an initial payment with their application. Also they will not need to make monthly installments while their application is being considered.
The IRS may determine that you cannot pay off your tax debt. If so, they may report that your account cannot be collected at the time, and a temporary delay on collections will be reported until your financial status improves. This does not mean that your tax debt goes away. All it does is determine that you cannot pay your taxes at that time. You may be asked to complete a Collection Information Statement prior to the approval of your request. Even if you receive a temporary delay on your tax payments, you will still be charged penalties and interest until you pay the full amount.
You can request a temporary delay, and or discuss other payment options with the IRS by calling 800-829-1040. Also the IRS provides information on the collection process for those who are filing or paying late, which covers every unique situation in detail.
For even more information, the IRS has published Ten Tips for those Who Owe Money to the IRS.
How can I minimize Penalties?
Having to pay penalties and interest on your owed taxes are even worse if you have a large tax bill. It is very possible to minimize penalties and interest in three ways: exceptions to underpayment of tax penalties, abatement of penalties, and paying off your tax debt as quickly as possible.
Exceptions to Underpayment of tax penalties
Taxes must be paid as you earn income during the year. This can be done either through withholding or estimated tax payments. You can be charged a penalty for not pre-paying enough of your taxes. Also you may be charged a penalty if your estimated tax payments are late, no matter if you are due a refund on your tax return or not.
If you're unsure whether or not enough is being withheld from your income, you can use the IRS' Tax Withholding Estimator.
For those making estimated tax payments, they can use the worksheet in Form 1040-ES to figure out their estimated tax.
If your current year's taxes were underpaid, but you owed less last year, a penalty is typically not applied for underpayment if you withheld at least as much as you owed the prior year. This only applies if you pay by the due date of the current year. Most taxpayers will avoid the penalty if they owed less than $1,000 in tax after filing their tax return, or if the paid at least 90% of their taxes for the current year, or 100% of the taxes on their return for the prior year. Whichever is less.
Asking for an Abatement of penalties
If you're currently in a situation of extenuating circumstances, you can write a letter explaining the situation, seeking an Abatement. The IRS can remove penalties from your tax debt if they find the cause of your situation to be reasonable. They will consider any sound reason for failing to file a tax return, make a deposit or pay your taxes when they were due. These sound reasons can be, if established:
- Natural disaster, Fire, casualty, or other occurrences of this type.
- You're unable to obtain records
- There was a Death, serious illness, incapacitation or unavoidable absence of you or a member of your immediate family
- "Other reason which establishes that you used all ordinary business care and prudence to meet your Federal tax obligations but were nevertheless unable to do so"
First time penalty abatement Waiver
The First Time Abatement Waiver (FTA) can abate some penalties that the IRS has assessed against you. That is if you meet certain requirements. This applies to situations of failure to file or failure to pay penalties. It doesn't apply to estimated tax and accuracy penalties. To qualify, you must have a record that has been penalty free for three years. The estimated tax penalty doesn't disqualify you from receiving a FTA. Penalties that the IRS has abated prior for cause do not disqualify you from a FTA. You must have filed all of your returns, and if you owed anything, you must be current on your payment plan with the IRS.
Interest cannot be abated on an unpaid balance for a reasonable cause, however it can be reduced or removed on a penalty when the penalty itself is either reduced or removed.
You can either fill out and send Form 843, Claim for Refund and Request for Abatement or you can send a penalty abatement request letter to the IRS to request an abatement.
You can call the IRS directly to get help with receiving an abatement at: 800-829-1040.
Pay your taxes As Quickly As possible
Don't wait till the last minute to file your return if you owe taxes that may be subject to interest or penalties. Send an estimated tax payment or file early if you can, and pay as much as you can. If you chose to file an extension, your taxes are still due on the filing deadline. If you don't pay by the due date, you will be subject to extra penalties and fees.
Paying as much as you can, when you can, really helps to prevent further penalties and fees, as well as decreases the amount owed, overall.
Bottom line, getting on top of your taxes as soon as possible is very important and the first rule. Putting off filing, or paying on your taxes can, and will, in most cases hurt you more in the long run. The IRS has many solutions for virtually every unique tax situation. In the majority of cases, they will work with you and your own personal tax situation so that you can eventually pay off your tax debt, all the while making sure you aren't spreading yourself out financially.