If you owe the IRS, you have many options to pay
But not paying will only cost you more in the end
Owing $500 or $1,000 for your federal income taxes is one thing. But what if you owe far more than that — and there’s no chance you can pay by the tax deadline?
Fortunately, you have options. Roughly 8.26 million new federal income tax accounts went into delinquent collection status in fiscal 2017 after a return was filed without paying the taxes due, according to data from the Internal Revenue Service. Relatively speaking, it’s a fraction — nearly 3.4% — of all 245 million returns filed in 2017, including individuals and businesses.
But you don’t want to go to that extreme. Figure out a way to file a tax return by this year’s April 17 deadline, pay as much as you can afford now to reduce the cost of additional interest and penalties, and work out a payment strategy.
Run the numbers before choosing not to pay
For some families, it can be as simple as running the numbers to review what works. Take someone who owes $2,000 in federal income taxes and doesn’t have all that money now but might in six months.
The cost would be about $2,090 if a return is filed now and the payment is made by Oct. 15 — including $90 in failure-to-pay penalties and interest, according to The Tax Institute at H&R Block.
But the cost goes up to $2,230 if you file now and pay by credit card, thanks to interest and convenience fees. In this example, the credit card is assumed to have an 18% annual percentage rate. And this assumes you’d pay the bill in six months — the cost goes up the longer you take to pay.
The most expensive option is doing nothing. Don’t file a return, don’t file an extension now and then don’t pay any of the taxes due until Oct. 15. Then, the cost hits $2,600 — including both the IRS failure-to-file and failure-to-pay penalties and interest, according to The Tax Institute at H&R Block.
“The bottom line on taxes is that you should file regardless of payment,” said Luis Garcia, a spokesman for the IRS in Detroit.
The IRS penalty for failing to file can be as high as 5% of the unpaid taxes for each month or part of a month that a tax return is late. The penalty can build up to as much as 25% of your unpaid taxes.
The IRS has payment options that are available online. See irs.gov/opa.
Why people owe
People end up owing money, instead of getting a tax refund, for many reasons.
“The biggest shocker to my clients is when they are issued a 1099-MISC for non-employee compensation,” said Joseph DeGennaro, tax director for Doeren Mayhew in Troy.
Take someone who made $50,000 in the gig economy and assumes he didn’t pay any taxes through quarterly payments during 2017.
If that person is single with no dependents, the “Amount You Owe” on Line 78 of the 1040 form would be a whopping $12,010. (That’s assuming the person takes the standard deduction, as well, and hasn’t tracked appropriate expenses that could be deductible against the $50,000.)
The reason the bill is so high? The person would owe federal income taxes — as well as the appropriate taxes for Social Security and Medicare taxes.
Yet there are other reasons for big tax bills.
This tax season, investors who hold money in mutual funds outside tax-deferred retirement accounts are seeing significant capital gains distributions after the robust rally on Wall Street. Or maybe someone sold a business or stock in 2017 and didn’t plan for the tax hit.
If you are unable to pay, you need to try to work out your problems early. Here’s a look at some options:
❚ Do you need an extension? You can get an automatic six-month extension to file your tax return by filing Form
4868. Filing an extension helps you avoid a failure to file penalty. But remember, pay as much of what you owe as you can by April 17 to reduce penalties and interest.
❚ Can you pay by credit card or debit card? It’s a pricey option but one that some with smaller tax bills should consider. You’re paying an upfront processing fee that can range from 1.87% to
1.99%. The minimum fees start around
$2.50 for small tax payments. And the fees are even higher if you use tax-prep software that has a payment plan builtin with e-filing. The Turbo-Tax option has a processing fee of 2.49%.
❚ Can you pay in a few months? You might qualify for a short-term payment plan if you can pay within 120 days or less. There is no online set-up fee, but you will pay applicable penalties and interest until you pay in full.
❚ Do you need a couple of years to pay off the tax debt? If you owe a great deal of money, look into a monthly installment agreement. You’re eligible for a guaranteed installment agreement if the tax you owe isn’t more than $10,000 and you meet other requirements, including agreeing to pay the full amount you owe within three years. You also must be financially unable to pay the liability in full when it’s due.
❚ Owe more than $10,000? There’s a six-year installment agreement for those who owe more than $10,000 through $50,000. You can apply online for a IRS payment agreement if your balance due isn’t more than $50,000.
❚ Owe more than $50,000? If you owe $50,000 to $100,000 for an individual return, you may be able to work out a payment plan for up to seven years. Filing for such an installment plan can help you avoid accruing even more interest and penalties, prevent problems in obtaining a loan in the future and avoid seeing the IRS take hold of your future tax refunds.
It will also prevent the IRS from seizing your assets.