- Calculation of Back Taxes
- Pros & Cons of Requesting an Extension to File Your Taxes
- How to File an Income Tax Amendment
- What Happens If You Don't Pay Quarterly Tax Installments on Time?
- Can I File My Income Tax Electronically If I Owe From a Previous Year?
- What Will Happen if I Filed My Income Taxes and Forgot a W-2?
You might discover you owe the Internal Revenue Service money when you prepare your annual tax return. If the outstanding balance is more than you can pay, you have several options. One approach is to arrange installment payments. Whatever you do, file your return by the deadline or get an extension. Otherwise, you will be assessed a late-filing penalty on the balance you owe each month you are late.
Even if you can’t afford to pay all of the taxes due when you file your income tax return, it’s a good idea to pay what you can. The reason is that the IRS calculates penalty and interest charges based on how much you owe. The smaller your balance, the less those extra charges will be. Consider financing the payoff through a commercial lender because interest charges might be less than the penalty and interest the IRS will assess. Alternatively, you can pay the balance due within 120 days and not have to pay a fee by arranging installments.
When other options won’t work, you can request an installment arrangement by completing Form 9465, “Installment Payment Request,” and attaching it to your tax return. If you already filed you return, you can attach the 9465 form to the IRS bill when you receive it. Mail the bill and form to the address on the bill. A third alternative is to call the IRS at 800-829-1040 and arrange an installment plan by phone. There is a one-time fee of $105 to set up an installment plan. The IRS reduces the fee to $52 when you authorize automatic debits from your bank account. When you make the installment arrangement, be realistic about how much you can pay each month. You will be less likely to find yourself forced to default on the arrangement or to restructure it, which will cost you an additional fee.
If you want to arrange automatic debits, provide the IRS with your bank routing number and account number. You also have to specify a payment date and amount. A second payment method is to agree to make online payments one at a time from your bank account. You may also pay by credit card, debit card, check or money order. Finally, you may arrange to have installment payments deducted from your paycheck.
Penalty and Interest
Regardless of the payment arrangement you make, you will be assessed a penalty and interest on the outstanding balance due the IRS until it is paid. The interest rate is the federal short-term rate plus 3 percent and is updated every three months. The penalty is 0.5 percent per month, up to a maximum of 25 percent. To encourage taxpayers to set up installment arrangements, the IRS reduces the penalty to 0.25 percent for every month an installment arrangement is in effect.