Ed note: If you finished preparing your tax return only to discover that you OWE the government a large sum of money you might be upset or worried about how to pay the amount. You need to know that there are options available to you. Mike Slack, from The Tax Institute, explains. Leer en español.
The consequences of not being able to pay your tax liability may appear to be dire to most. There are two penalties that generally apply to taxpayers who owe the IRS.
- The first is the “failure to file” penalty, which accrues at the rate of 5% per month (to a maximum of 25%) on the amount owed.
- The second is the “failure to pay” penalty, which accrues at the rate of only 1/2% per month (to a maximum of 25%) on the amount due.
If both apply, the failure to file penalty drops to 4.5% per month, so the total combined penalty remains at 5%.
The maximum combined penalty for the first five months is 25%. Thereafter, the failure to pay penalty can continue at 1/2% per month for 45 more months. Thus, the combined penalties can reach a total of 47.5% over time.
However, if your return is more than 60 days late, the minimum penalty will be $135 or the amount of any tax you owe, whichever is smaller.
To add insult to injury, both of these penalties are in addition to the interest you will be charged for late payment that is calculated separately. Luckily, for those individuals unable to pay their taxes on the due date of their tax return, there are options.
How you can pay a tax bill over time
If paying your taxes would cause financial hardship, and you have the documents to prove it, you may qualify for a “hardship extension” to pay tax due. Under a hardship extension:
- You will avoid the failure to pay penalty if the extension is granted, but you will still be charged interest.
- If you qualify, you will be given an extra six months to pay the tax shown as due on your tax return.
- If the IRS determines a “deficiency,” i.e. that you owe taxes in excess of the amount shown on your return, the undue hardship extension generally can be as long as 18 months, with some extensions. However, no extension will be granted if the deficiency
was the result of negligence, intentional disregard of the tax rules or fraud.
It is important to note that in order to establish undue hardship, it is not enough to show that it would just be inconvenient to pay your taxes when due.
Another way to defer your tax payments is to enter into an “installment agreement” with the IRS, where you can make monthly payments on your tax debt and reduce, or even eliminate, the imposition of penalties or interest.
- A taxpayer requests an installment agreement by filing Form 9465, and paying a fee ranging from $43 to $120 which is deducted from the first payment.
- Installment agreements can have repayment periods of up to 72 months, and are subject to an interest rate that right now is approximately 3.40%.
One additional option is to borrow money to pay the tax debt, especially if you do not qualify for the options above. For example, loans from relatives or friends are often the simplest method to pay the bill. One advantage of such loans is that the interest rate will probably be low. However loans over $10,000 at below market interest rates may cause adverse tax consequences.
If after exhausting all other possible options, you might want to consider an “offer-in-compromise.” The IRS would prefer at least a partial payment of a tax debt, as opposed to no payment at all. Therefore, the IRS is sometimes willing to settle a tax liability for less than the full amount if (a) the taxpayer is unable to pay the full amount, (b) there is doubt as to how much the tax liability is, (c) collection would create economic hardship, or (d) compelling public policy or equity considerations exist. It is important to note that the IRS only accepts a minority of offers-in-compromises.
Lastly, as with any issues related to debt settlement, it is important to be mindful that there may be some unscrupulous companies claiming they can settle your tax debt for pennies-on-the-dollar in exchange for a fee. It is always good advice to consult reviews or the Better Business Bureau before engaging one of these companies.
At H&R Block we are here to help you with your taxes in all manners, not just the filing of your return. If you’re having behind on paying your taxes, we strongly suggest you visit one our trained tax professionals to explore your options going forward.