It's already stressful to complete your tax return. But it can be even worse to realize that you owe the IRS money and don't have the cash available to make a lump-sum payment.
The IRS, though, has dealt with this dilemma many times before. It offers a few options and grace periods.
How Soon Can You Pay?
First, figure out how quickly you can pay off the tax debt. Paying it all at once will save you some money if you can come up with the cash. The IRS will continue to assess late-payment penalties and interest up through the date you pay in full.
The IRS charges interest at the rate of .5% of the amount you owe each month, up to a total of 25% of your tax debt.
If You Can Pay Within 45 Days
Can't pay your tax bill in its entirety right now, but know you'll be able to do so within 45 days? Send in a partial payment using the Form 1040-V payment voucher at the time you file your tax return.
Most tax preparation software provides this form. It's also available on the IRS website.
Then wait for the IRS to send you a letter, known as the "Notice of Tax Due and Demand for Payment." This will detail your outstanding balance and any late charges that have been added.
The IRS usually provides a grace period of 21 days after sending that letter to avoid additional interest and penalties. If payment is not received within 60 days, the IRS can proceed with collection activity.
Pay your remaining balance by the deadline set by the IRS if you possibly can.
If You Can Pay Within 120 Days
The process is similar if you can pay off the tax you owe within six months. Send in a partial payment using Form 1040-V. Then wait for the IRS to send you a letter telling you how much you owe, including interest and late charges.
Next, call the IRS at the number shown on the letter. Request a short-term extension of time to pay beyond the date set in the letter.
This deadline is normally 120 days. It was extended by two additional months to 180 days in 2020 in response to the coronavirus pandemic.
When you talk to an IRS representative, propose a definite deadline for paying off your balance in full. They will note that date in your records. Use the payment voucher that's included with the letter to make your next and final payment.
Calling the IRS is important with this payment tactic. It will prevent the agency from taking more aggressive collection actions. You're letting the IRS know that you're on top of the situation and trying to fix it.
If You Need More Than 120 Days
Need a more significant time to pay off your debt? The IRS will usually let you set up a monthly payment plan called an "installment agreement."
Depending on how much you owe, you might also have to submit a financial statement. Streamlined installment-agreement applications are available, though, for taxpayers who owe up to $50,000.
The IRS does charge a fee to set up these plans. As of the 2020 tax year, this fee ranges from $31 to $225, depending on how you make your payment. There are options and reduced fees available to low-income taxpayers who qualify.
This is a one-time fee that's paid upfront. It is often part of your first payment.
You can apply for an installment agreement on the IRS website if you owe $50,000 or less. You also can file your request on Form 9465.
Your interest rate will drop to 0.25% if you commit to an installment agreement.
Temporarily Delay Collection
This option doesn't come with a set date by which you can pay off the IRS. It's available only if the IRS agrees that collecting from you at that point in time would present an undue financial hardship to you.
Your tax debt doesn't go away. It's put on hold until such time as your finances recover.
You must be able to prove that you would not be able to meet your necessary living expenses if you were to pay the debt. The IRS will categorize your matter as "currently not collectible." Penalties and interest will continue to accrue, however.
The IRS is effectively agreeing not to aggressively pursue you for the money by way of levies and other collection avenues available to it when it agrees that your tax debt is "currently not collectible."
When You Can't Pay Your Taxes at All
Not able to pay your taxes at all? It's best to seek advice from a tax professional who's authorized to represent you before the IRS. Typical examples are CPAs, attorneys, and enrolled agents.
Many tax clinics provide free or low-cost access to tax professionals. That's generally a good place to start if you need help. A competent tax professional can evaluate your options. These might include:
- Temporary delay
- Partial payment plan
The Taxpayer Advocate Service also provides free help to taxpayers who have problems with the IRS. In-person visits aren't available during the coronavirus pandemic, but you can still reach out for help by phone.
Special Provisions for 2020 and 2021
The IRS extended the payment date in 2020 for 2019 taxes, from April 15 to July 15, in response to the coronavirus pandemic. Interest and penalties didn't begin to accrue on any balance owed until July 15, 2020.
In 2021, Texas, Oklahoma, and Louisiana suffered severe winter storms. Those states were declared disasters areas. In response, the IRS extended filing deadlines to June 15.
The 2021 payment date for 2020 taxes was extended to May 17, 2021. Taxpayers had one extra month before penalties and interest began to accrue.
The Bottom Line
The worst thing you can do is to do nothing if you owe the IRS money. The agency typically welcomes all overtures to get tax debts paid. It might even accept less than what you owe if your financial situation qualifies.