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How to Work With the IRS to Pay Your Tax Bill

Tax Filing Tax Planning Taxes

It’s no secret that tax refunds get the spotlight each tax season. But in all reality, many Americans end up owing the IRS money after they file. This tax season is no different. In fact, for some, a tax bill this year is an even harsher reality than in years past.

A man on phone while working.

Fortunately, the IRS provides convenient ways to pay your tax bill even if you don’t have the cash available at the time it’s due. The agency offers a variety of payment plans to help you tackle that debt. Let’s take a look at the options.

What happens when you don’t pay your tax bill on-time

There are two possible penalties you may owe if you fail to both pay and file your tax return by the deadline.

  • Failure-to-file penalty: Generally, you will owe 5 percent of the unpaid taxes for each month you’re late to file. That maxes out at 25 percent of your unpaid taxes.
    You could apply for an extension to file, which gives you six more months to submit your return. However, that doesn’t give you an extension on paying what’s owed. For 2019, that money is still due on July 15 2020 even if you file for an extension.
  • Failure-to-pay penalty: You will owe 0.5 percent of your unpaid taxes for each month or part of the month that you fail to pay (think of it as an interest payment). That, too, can build up to being 25 percent of your unpaid taxes.

What many people don’t realize is that you can actually file your taxes, even if you can’t pay your tax bill. The IRS recommends that you at least file your taxes on time to avoid the failure-to-file penalty, and then pay as much of your bill as you can before the deadline. Next, you should be proactive about setting up a payment plan for the remainder of your debt to Uncle Sam.

IRS payment plan options

Pay Now: For those who can pay their tax bill immediately, the IRS makes doing so simple and free. You can pay via Direct Pay, which takes the money directly from your checking or savings account. Or, you can use the Electronic Federal Tax Payment System (EFTPS) via the internet or phone.

Short-term payment plan: If you’re short on cash and owe less than $100,000 but know you can pay your tax bill plus any penalties in under 120 days, this payment option is for you. You can apply online, in-person or via phone and set up automatic payments from your checking account for no additional fee. You can also use a money order or debit/credit card, but fees will apply when paying with a card.

Long-term payment plan (installment agreement): If it’s going to take you more than 120 days to pay your tax bill plus penalties, and you owe $50,000 or less, you could consider a long-term payment plan. There are two versions:

  • Direct debit: You pay a $31 set-up fee and agree to automatic withdrawals for your outstanding balance until it’s paid in full.
  • Non-direct debit: This option costs a $149 setup fee (or $43 if you qualify as low income). To submit a payment, you can use direct pay, a check, a money order or a debit or credit card. (Again, you’re subject to fees if you use a card.)

Consider an Offer in Compromise: The Offer in Compromise allows you to settle the debt you owe by paying less than the full amount due. This option is only available to those who can’t pay their bill in full or for whom paying their tax debt will create a significant financial hardship. You can check with an IRS online tool to see if you pre-qualify for an Offer in Compromise and discuss your specific situation directly with the IRS to determine if you can work out a deal.

The way you shouldn’t pay off your tax bill

It’s usually best to avoid paying your tax bill with a credit card. The average credit card annual percentage rate (APR) is 20.09%, according to data collected by The Balance in June 2020.

Not only will you incur a fee from the IRS by paying with your credit card but financing that debt at a high-interest rate means you pay a lot more in the form of interest. Going that route will take you longer to be debt free.

Instead, shop around for ways to pay your bill (perhaps a personal loan or just use one of the aforementioned payment plans). Evaluate your options and determine the cheapest possible way for you to settle up with the IRS.

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