It’s already stressful to complete your tax return. But it can be even worse to find out you owe the IRS money and don’t have the cash on hand to make a balloon payment.
However, the IRS has faced this dilemma many times before. It offers some options and grace periods.
How soon can you pay?
First, find out how quickly you can pay off the tax debt. Paying for it all at once will save you some money if you can scrape together the cash. The IRS will continue to assess late payment penalties and interest until the date you pay in full.
The IRS charges interest at a rate of 0.5% 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 full right now, but know you can within 45 days? Submit a partial payment using the Form 1040-V payment voucher when you file your tax return.
Most tax preparation software provides this form. It is also available on the IRS website.
Then wait for the IRS to send you a letter, known as a “Notice of Taxes Due and Demand for Payment.” This will itemize your outstanding balance and any late fees that have been added.
The IRS generally provides a 21-day grace period after sending that letter to avoid additional interest and penalties. If payment is not received within 60 days, the IRS may proceed with collection activity.
Pay your remaining balance by the IRS due date if possible.
If you can pay within 120 days
The process is similar if you can pay the tax you owe within six months. Submit a partial payment using Form 1040-V. Then wait for the IRS to send you a letter telling you how much you owe, including interest and late fees.
Then call the IRS at the number shown on the letter. Request a short-term extension to pay beyond the date stated in the letter.
This period is normally 120 days. It was extended for an additional two months to 180 days in 2020 in response to the coronavirus pandemic.
When you speak with an IRS representative, come up with a definite due date for paying your balance in full. They will note that date in their records. Use the payment slip included with the letter to make your next and last payment.
Calling the IRS is important with this payment tactic. It will prevent the agency from taking more aggressive collection action. You are letting the IRS know that you are aware of the situation and are trying to fix it.
If you need more than 120 days
Do you need more significant time to pay off your debt? The IRS will generally allow you to 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 you pay off your tax debt in six years or less.
Depending on how much you owe, you may also need to submit a financial statement. However, simplified installment agreement applications are available for taxpayers who owe up to $50,000.
The IRS charges a fee to set up these plans. As of tax year 2020, this fee ranges from $31 to $225, depending on how you make your payment. Options and reduced rates are available for low-income taxpayers who qualify.
This is a one-time fee that is paid in advance. It is often part of your first payment.
You can request an installment agreement on the IRS website if you owe $50,000 or less. You can also file your application on Form 9465.
Your interest rate will drop to 0.25% if you agree to an installment agreement.
Temporary pick-up delay
This option does not come with a set date when you can pay the IRS. It is available only if the IRS agrees that charging you at that time would place an undue financial hardship on you.
Your tax debt does not go away. It is put on hold until such time as its finances recover.
You must be able to prove that you would not be able to cover your necessary living expenses if you were to pay the debt. The IRS will classify your matter as “Currently Not Collectible.” However, penalties and interest will continue to accrue.
The IRS is effectively agreeing not to aggressively go after you for money through liens and other available collection avenues when you agree that your tax debt is “not currently collectible.”
When you can’t pay your taxes at all
Can’t pay your taxes at all? It is best to seek the advice of a tax professional who is 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 usually a good place to start if you need help. A competent tax professional can evaluate your options. These may include:
- temporary delay
- partial payment plan
- offer in compromise
The Taxpayer Advocate Service also provides free help to taxpayers who have problems with the IRS. In-person visits are not available during the coronavirus pandemic, but you can still request help by phone.
Special Provisions for 2020 and 2021
The IRS has extended the 2020 due date for 2019 taxes from April 15 to July 15 in response to the coronavirus pandemic. Interest and penalties did not begin accruing on any balance due until July 15, 2020.
In 2021, Texas, Oklahoma, and Louisiana experienced severe winter storms. Those states were declared disaster areas. In response, the IRS extended the filing deadlines to June 15.
The 2021 payment date for 2020 taxes was extended to May 17, 2021. Taxpayers had an additional month before penalties and interest began to accrue.
The worst thing you can do is do nothing if you owe the IRS money. The agency generally welcomes all proposals to pay tax debts. You could even accept less than you owe if your financial situation qualifies.