Each year, millions of Americans discover they owe money to the IRS. For the 2018 tax year, one estimate indicated that around 30 million people – 21 percent of all US tax filers – will end up with an IRS tax bill this year. If you are one of those 30 million, addressing the situation is a must. Otherwise, you could accrue penalties. As well as increase the size of your tax debt.
What You Need to Do
First and foremost, regardless of whether you can afford to pay what you owe, you need to file your tax return. Failing to file on time could leave you facing some large penalties. Many of the penalties may be much bigger than just being unable to pay.
The normal failure-to-file penalty is 5 percent of your unpaid taxes every month. Although it may not exceed 25 percent, it can add up quickly. Plus, you also have to pay the failure-to-pay penalty on top of the failure-to-file penalty.
In comparison, the failure-to-pay penalty is one-half of 1 percent of your unpaid taxes each month after the filing deadline of April 15. While that still increases your debt, it is a much smaller penalty. By filing on time, even if you can’t pay, you limit the amount of the penalty fees you will owe.
How to Pay Your IRS Tax Bill Immediately
If you can afford to pay your IRS tax bill right away, then you have a few options. For paying the balance in full, you can either submit payment through the IRS website, over the phone, or mail a check or money order.
To pay online, you have to create an IRS account at the IRS website. Once you do, you will be able to see your tax year and go through a simple process to submit your payment. You’ll receive a confirmation when the payment processes, and there are options to pay using a checking or savings account for free. If you choose to pay with a debit or credit card, the payment processor (not the IRS) usually charges a convenience fee.
For paying over the phone, you will need to use a credit or debit card and could have to pay a convenience fee as well. If you mail a check or money order, there is no convenience fee.
However, you do have to send additional forms to make sure your payment is applied to your IRS tax bill. If you filed your taxes online, the required forms usually appear in your final tax return documents. You also need to make sure you send everything to the right address based on your state of residence. If you can’t find instruction in your tax return, you can refer to the IRS website to make sure you handle it properly.
How to Get a Payment Plan with the IRS
If you can’t afford to pay your IRS tax bill immediately, you can try to set up a payment plan. One of the easiest options for starting the process by creating an IRS account online and applying for a payment plan. However, if you file your taxes online, you may also be able to request a payment plan through your tax software, though this isn’t always available.
Setting up a payment plan for 120 days or less lets you avoid any setup fees, though you will accrue interest at the failure-to-pay rate. If you need more than 120 days, you will need to pay a setup fee (unless you are eligible for a low-income waiver).
If you use direct debit for your payment plan, your setup fee is reduced, but not eliminated. Plus, you don’t have to worry about whether your payments will be on time, which can be a great stress reliever. However, non-direct debit options are also available.
Anyone who has questions about the options should contact the IRS directly. An employee can explain the various programs in detail and make sure you can find an option that works best for you.
How to Settle Your IRS Tax Bill
If you owe a large sum to the IRS, you may be able to settle the debt for less than you owe. Known as an Offer in Compromise (OIC), you essentially work with the IRS to settle your IRS tax debt for a smaller amount.
It’s important to note that not everyone qualifies for an OIC. If you could pay the amount in-full upfront or with a payment plan, your request will likely be denied. However, if you have filed all of your present and past returns, and made any required estimated payments or deposits during the current tax year, the process may work for you.
Typically, for an OIC, you have to offer an amount that is equal to or above what the IRS deems is your Reasonable Collection Potential (RCP). This is a measure that estimates your ability to pay, assessing everything from your income to various assets (such as real estate, vehicles, bank accounts, and other property) to decide how much they think you can manage.
The amount you offer can either be a lump sum or based on a payment plan. However, if you opt for the latter, you do need to be able to make the first proposed payment immediately. Remember, the IRS can say no. However, if what you owe is unmanageable, it is worth contacting the IRS and exploring the option.
It’s important to note that the OIC process is exactly what the IRS debt service companies do if you work with them. However, they will charge you a fee for something that you can handle yourself, so don’t default to that approach thinking it will save you more.
Have you ever settled a tax bill? Share your experience in the comments below.
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