Some Americans may feel unable to pay their tax debt by the April 18 deadline this year, with tax day just around the corner.
The Internal Revenue Service fortunately provides a few repayment options to help you handle your outstanding debt.
CPA, certified financial planner, and head of tax at Betterment Eric Bronnenkant said to us: “It is a common situation for taxpayers to run into, not having enough money to pay taxes that are due when they file a tax return.” But you have a lot of options to help you pay off that debt.
You should be aware of the following.
Short-term repayment plan
Making a short-term repayment plan application is one way to pay off your tax debt. “This option is available to taxpayers who owe less than $100,000 [in total tax, penalties, and interest],” Bronnenkant said. Penalties and interest are accrued up until the balance is paid in full; there is no formal application [set up fee] fee.
Plans for quick payments have a maximum 180-day repayment period. Applying to set up the installment agreement can be done online or by calling the IRS at 800-829-1040 and sending a Form 9465.
You have the option of paying the debt in full with a debit or credit card, check, money order, or directly through Direct Pay from your checking or savings account. But using a credit card incurs fees.
Long-term payment schedule
You can also apply for a long-term repayment plan, according to Bronnenkant, if you are unable to pay off your outstanding balance in less than 180 days. Taxpayers must have submitted all necessary returns and owe a total of $50,000 or less in tax, fines, and interest to be eligible.
If you decide to pay with monthly automatic withdrawals, this repayment plan has a setup fee of $31, or $130 if you choose a non-direct debit repayment option. Automatic payments are also necessary, according to the IRS, if your outstanding balance exceeds $25,000 for individuals and $10,000 for businesses.
For low-income taxpayers, application fees may be waived, according to Bronnenkant, who also noted that the term of a long-term repayment plan may not exceed 72 months.
You can apply directly through the IRS website, speak with an IRS representative, or submit a Form 9465, just like with the short-term repayment plan.
Offer as a conciliation
An Offer in Compromise may be requested if you are unable to pay your tax debt on time or if doing so would put you in a difficult financial situation. A deal to settle the tax liability for less than what is owed has been reached between the IRS and the taxpayer.
A compromise can be a drawn-out process, according to the National Taxpayer Advocate. However, if the IRS doesn’t decline, withdraw, or return your offer within two years of the postmarked receipt date, it will be considered accepted.
The IRS might be willing to accept a settlement for a payment that is less than the total amount owed, but this option is purposefully difficult to qualify for, so anyone thinking about it should use the pre-qualifier tool, according to Bronnenkant. “The ability to pay, income, expenses, and asset equity are factors that are taken into consideration.”
If there is a “doubt as to collectibility,” which means that you don’t have enough income or assets to pay off the balance in full, the IRS might accept your offer, as Bronnenkant mentioned. Another justification is if the IRS concludes that the taxpayer would suffer a great deal of hardship or injustice if the debt were paid off.
Finally, if you have “doubt as to liability,” which means you think the debt amount is exaggerated, the IRS may accept a payment of less than the full amount.
Bronnenkant cautioned that if you’re thinking about requesting a compromise, be sure to be prepared with all the necessary paperwork to help you track any payments you’ve made or provide an explanation for why you are unable to pay the debt in full.
He stated, “The IRS is currently working harder to improve the taxpayer experience. They want to keep things moving along while assisting people in overcoming their particular difficulties.