If tax day is approaching, and you can't come up with the money to pay your federal income tax, you might be inclined to panic. However, you do have options when you're not able to pay your income taxes on time. Understanding what those options are—and what the penalties are for paying or filing late—can help you decide which path to take to handle a looming tax bill.
Late-Payment and Late-Filing Penalties
The IRS assesses penalties for filing your return late and for paying your taxes late.
The failure-to-file penalty is accessed at a higher percentage rate than the failure-to-pay penalty, so you should file your return even if you don't have the money to pay the tax you owe.
The failure-to-file penalty is usually 5% of the tax owed for each month or partial month that your return is late, up to a maximum of 25%. In addition, if your return is more than 60 days late, you will have to pay a penalty amounting to the lesser of $435 or 100% of the tax owed.
The failure-to-pay penalty is 0.5% of the tax owed for each month or partial month, up to a maximum of 25%, until the tax is paid in full. That rate increases to 1% if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy property. Such a notice frees the IRS to seize any state income tax refund you have coming to you. You will then have the right to a hearing before the IRS Office of Appeals. After that, the IRS may be able to seize your wages or other income, your bank accounts, business or personal assets, and/or Social Security benefits.
Any penalty amount given on your bill from the IRS is typically the amount calculated as of the date of the notice and does not reflect the amount you will be charged beyond that date.
In addition to any penalties, you will be charged interest on the amount of tax you owe until the tax is paid in full. The interest rate is set quarterly and is equal to the federal short-term rate plus 3%, with interest compounded daily. With rates at effectively 0%, as of the first quarter of 2021, the interest rate owed is 3%.
Installment Plan Payments
If you file your return on time and receive approval from the IRS to pay your tax in installments, the interest rate on the owed amount is 0.25% for every month in which the installment agreement is in effect.
If you have already filed your return, you may request an installment plan online, by telephone, or by mail. If you haven't yet filed your return, you may attach a written request for a payment plan to the front of your return.
Credit Card Payment
If you don't have the cash to cover your tax bill when you file, you can use a major credit card (Visa, Mastercard, American Express, or Discover) to pay it. You will have to do so, however, through one of three service providers approved by the IRS: PayUSAtax, Pay1040, or ACI Payments, Inc. You will be charged a fee of 1.96% to 1.99% of the amount you're paying, with a minimum fee of $2.69, $2.58, or $2.50, respectively.
Keep in mind that your credit card provider will charge you interest on any unpaid balance every month. The average annual percentage rate on credit cards as of March 2021 was 20.29%.
An Offer in Compromise
If you owe so much that there's no way you'll ever be able to pay it, the IRS may accept less than the full amount through an offer in compromise (OIC), which is essentially a settlement agreement in which the IRS permits you to pay the most money it could expect you to be able to pay in a reasonable amount of time.
When evaluating an OIC, the IRS considers your unique situation, including your:
- Ability to pay
The IRS considers an OIC to be a last resort and encourages you to first consider all other payment options.
Form 656-B explains how to request an offer in compromise. You will have to complete Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and Form 656, the request for an OIC, which the IRS states is "intended for tax professional use only."
You will also have to submit a non-refundable application fee of $205 and a non-refundable initial payment unless you meet the IRS's Low Income Certification guidelines. Your fee and payment will be applied toward the amount you will owe if your OIC is accepted. If it is rejected, you may file an appeal within 30 days.