What to do if you owe money to the IRS
What do you get when you put the words “THE” and “IRS” together. THEIRS. They will get THEIRS one way or another, but you do have a say in the matter, even when you owe them. Here is a primer.
Whatever you do, file your return on time. Even if you can’t pay what you owe. The failure-to-file penalty is the most onerous of all: 5% of the tax due for any month, or fraction of a month it is late, up to 25%.
Make a partial payment. Even if you can’t pay the whole tax bill, pay as much as you can. As long as you owe, the interest and penalties keep adding up. But, it also depends on the length of time, amount and where the money is coming from. Consider IRS does not report what you owe to credit bureaus as long as no liens are filed.
Request a payment extension. If you haven’t applied for a payment extension before, this could be another option. After you file your tax forms without payment, the IRS will contact you to ask whether you would be able to pay within 120 days. If you choose this option, the agency will charge you a monthly fee of 0.5 percent of the amount owed.
Consider an installment plan. This is a good option if you need more than 120 days to pay your tax bill and you owe less than $50,000. When you file your tax return, fill out an online payment agreement or Form 9465. The IRS will then set up a payment plan, which can last up to six years. You’ll incur a setup fee, which ranges from about $31 to $225 depending on how much you owe.
Ask for leniency due to hardship. You’ll need to prove that paying your tax debt would cause you a tremendous burden, perhaps forcing you to sell your home. But this could get you more time to make your payment, and in some cases the IRS will also waive any payment penalties. If the delays are for illness, or other relevant reasonable causes, and not due to neglect on your part, you may be able to have the penalties removed from your record. However, they usually require that you pay them first and then request abatement.
Apply for an “Offer in Compromise.”
This is a way to reduce your tax debt permanently. The IRS says that an offer in compromise allows you to settle your tax debt for less than the full amount you owe. It may be a legitimate option if you can’t pay your full tax liability or if doing so creates a financial hardship. Before applying for an offer in compromise, the IRS requires applicants to have filed all their tax returns. So, if you didn’t file in previous years, you will need to finish those missing returns. It also requires that you pay the current year’s estimated tax payments.