Payment Options if You Owe the IRS

Tax Time
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A common situation in October as people finish up their tax returns is finding out that you have to pay the IRS. This can be particularly stressful if you've never owed the IRS before, or if you are unsure of the options available to you. Here's some tips for how to make paying the IRS manageable.

First, consider the amount you owe and how quickly you'll be able to pay it off. If you can afford to, paying the tax all at once helps save you money, as the IRS will assess late payment penalties up through the date of payment.

The IRS will let you pay over time as well, just be aware that interest and late charges will continue to be added to your outstanding balance until it's paid off in full.

Once you have a time frame in mind for paying off your federal tax, then you can implement one of the following payment options:

Paying the IRS in 45 days or less: send in a partial payment using the Form 1040-V payment voucher provided by your software or accountant. Wait for the IRS to send you a letter in the mail, which will detail your outstanding balance and any late charges that have been added. The IRS usually provides a grace period on that letter between 30 to 45 days. Pay your remaining balance by the deadline set by the IRS.

Paying the IRS between 45 days to 120 days: send in a partial payment using the Form 1040-V payment voucher provided by your software or accountant. Wait for the IRS to send you a letter in the mail, which will detail your outstanding balance and any late charges that have been added.

Then call the IRS at the number shown on your letter and request a short-term extension of time to pay. Set a definite deadline for paying off your balance in full, and the IRS will note that in their records. Use the payment voucher included with the letter to make payments. Calling the IRS is important in this payment tactic, since it will prevent the IRS from taking more aggressive collection actions.

If you need more than 120 days to pay the IRS: you will need to set up a monthly payment plan, also called an installment agreement. This is a formal agreement to pay the IRS over time, and the IRS will likely approve your payment plan as long as your taxes are paid off in five years or less. Do be aware that the IRS charges a fee to set up these plans, ranging from $43 to $105, which is a one-time fee paid up front with your first payment.

If you cannot afford to pay your taxes at all, then your best bet is to seek professional advice from a tax professional authorized to represent taxpayers before the IRS (which are CPAs, attorneys, and enrolled agents). Many tax clinics provide free or low-cost access to tax professionals, and that's generally a good place to start if you need help. A competent tax professional can evaluate your options, such as setting up a partial payment plan or negotiating a settlement through the offer in compromise program.