What to Do if You Owe Tax

Owing taxes isn't the funnest part of the tax preparation process, but knowing the dollar amount in advance can help you plan ahead so you can pay off the IRS before the April 15th deadline.

One person recently asked me in person if she had to pay her balance due in one payment, or if she could split it up into separate payments? Taxpayers can send in smaller payments using the 1040-V payment voucher that prints out with your tax return (or that your tax accountant gives you).

As long as you pay off the balance before April 15th, the IRS won't charge you any penalties and interest.

Even if you cannot afford to pay in full by April 15th, you still have options. You should pick the payment option that will best fit your budget and keep any fees, penalties and interest to a minimum.

Option 1: Pay by credit card. You'll be charged a convenience fee for sending your payment to the IRS, and you'll pay interest charged by your bank. Even so, these fees and interest could be lower than what the IRS might charge you on an installment agreement. So do the math first to see which of those two options will be most cost-effective for you. There's two companies that act as third-parties for getting your credit card payment to the IRS: Official Payments and Pay1040. Both charge a 2.49% convenience fee.

Option 2: Monthly installment agreement. This is a formal payment plan you set up with the IRS to pay a fixed amount per month until your taxes are paid off.

This is a good option for people who just need some time to pay off their tax. The IRS will assess penalties and interest on any balance that's remains unpaid after April 15th. And the IRS charges a one-time set up fee (from $45 to $105) which is added to your first payment. You can even set up a payment plan right on the IRS Web site using the Online Payment Agreement application.

Option 3: Defer the payment by requesting non-collectible status. This is usually a good option for people who are facing severe financial hardships and need every dollar they have to provide for their basic necessities. The IRS has been especially helpful this year in dealing with hardship situations, so you shouldn't feel embarrassed about asking the IRS for a forbearance. Penalties and interest will continue to accrue, but the IRS will let you switch to a payment plan once your financial situation improves.

Option 4: Set up a partial payment plan. If your finances allow you to send some money to the IRS for taxes, but you cannot afford a regular installment agreement, then you might want to consider a partial installment agreement. Like a regular installment agreement, this sets up a plan for sending in a fixed amount per month. The difference is that the monthly payment amount will be based on your ability to pay. The IRS reviews these payment plans every two years, so your payments will likely change over time as your financial situation improves.

Option 5: Request an offer in compromise. This program allows a person to offer a lump-sum payment or a 24-month payment plan to settle their tax bill for less than the full amount owed. The advantage here is that your taxes are paid off for less money. The disadvantage: many people don't qualify for the program, and the IRS scrutinizes every little detail of your finances in an attempt to find out exactly how much you might be able to pay.

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