What are Your Options When You Owe the IRS Money?

Posted by Amanda on March 16, 2011

You’ve filed your delinquent tax returns, or perhaps you are still teetering on the edge because of the fear that you don’t have enough money to pay all of your tax obligations.

Maybe you are dreading the tax deadline because you have estimated your taxes and know that you will not have enough to pay them off.

No matter what, you should always file your taxes on time or as soon as possible if you realize they are late. After filling out the tax forms you can focus on how you will pay your tax obligations if you owe the IRS.

Penalties and Interest Accrued

There are both penalties and interest that must be paid when taxes are not paid in full at the time they are due. Here is a snippet straight from the IRS website if you owe taxes:

“The Failure to Pay Penalty is calculated at one-half of one percent of the tax owed for each month, or part of a month, that the tax remains unpaid after the due date, not exceeding 25 percent. The one-half of one percent rate increases to one percent if the tax remains unpaid after several bills have been sent to you and the IRS issues a notice of intent to levy. Beginning January 1, 2000, if you filed a timely return and are paying your tax pursuant to an installment agreement, the penalty is one-quarter of one percent for each month, or part of a month, that the installment agreement is in effect.”

As for the interest, the current rate charged is 3% when you owe IRS taxes. The interest, charged on any unpaid tax from the due date of the return until the date of payment, is compounded daily.

Update: The IRS is waiving failure to pay penalties for taxes due in 2012 for unemployed taxpayers. For more information see: Unemployed Tax Relief.

Determine What You Owe, and How Much Time You Need

By filling out your tax forms, you now know approximately what you owe (I say approximately because if your taxes are delinquent, penalties and interest will be assessed by the IRS once your form is submitted). Based off of how much you owe, make a plan and figure out how long you need to pay off this obligation. If you cannot pay the entire amount, take a look at the options below.

  1. Online Payment Agreement: If you owe $25,000 or less in combined taxes, penalties, and interest, you can use the Online Payment Agreement (OPA) to request an additional 30 to 120 days to pay. This option will cost you less in penalties and interest than the next option.
  2. Installment Agreement Request: This can also be requested through the OPA form above, or by filling out Form 9465. Once again, you need to owe IRS taxes, penalties, and interest of $25,000 or less to use this option, as well as be able to pay your balance within 60 months. For balances over $25,000, you are required to complete a financial statement to determine the monthly payment amount for an installment plan.
  3. Borrow Money: The IRS suggests that you borrow money, liquidate assets, or pay taxes by credit card in order to pay off your tax obligations because in many cases, it will be cheaper than paying through an installment plan. Please consider this option carefully.

Please note that any agreement you negotiate with the IRS will take into consideration your other financial obligations, your salary, etc. Be prepared to furnish this information to the IRS in order for them to determine if they will enter into an agreement with you. Also, penalties and interest do not stop accruing because you are in one of these agreements, so it is best to pay your obligation in full when you can.



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Comments to What are Your Options When You Owe the IRS Money?

  1. Having just gone thru this back in September, I’d like to add some comments. 🙂

    Here’s what happened to me in a nutshell: Despite filing yearly and giving the IRS my correct address multiple times, they attempted to contact me about 2000-2003 taxes at a PO Box address that I haven’t owned in years. When the letters got rejected, they garnished my wages – the first notification I got was from my company HR office. It took 2 months to negotiate a payment plan and get the garnishment removed.

    If the IRS garnishes your wages they will NOT leave you a living wage. They use one blanket figure based on the number of deductions you elect and how often you’re paid. For a married person who is paid bi-weekly, you’re left with $360 per paycheck. They do not take into account your expenses when they garnish – they take everything except the bare minimum.

    When you have delinquent taxes, whether they’ve gotten to the stage of being garnished or not, you can request assistance from an IRS Consumer Advocate. I STRONGLY suggest going this route rather than trying to do it yourself.

    You can go here: http://www.irs.gov/advocate/article/0,,id=97402,00.html for more information. If you file a form f911 to request assistance, it’ll take a few days and you’ll get a phone call from someone in the advocate’s office. They have access to all the information the IRS has and can help walk you through the process.

    My advocate was friendly, prompt, and professional. She gave me all the information I needed to get things resolved and established a payment plan based on the number I said I could pay ($200 per month). She even advised me to pick a lower number – saying that I can always pay extra but if the IRS agrees to the lower number, it gives you some wiggle room.

    Don’t go it alone and don’t shell out money to lawyers or groups who promise to negotiate on your behalf. Use the resources the IRS provides. It’s not nearly as scary as you think it might be!

    KH

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