If this year, you need to consider some payment options to help pay your taxes, you are not alone. Although most American taxpayers (74% in 2020) receive a refund when they file income tax returns, many end up owing. And of those who owe, many don’t have the means to pay by the return due date (usually in April).
Generally, when a wage earner under-withholds on payroll they end up owing taxes due. Another reason taxes are owed is if a self-employed individual did not make adequate estimated tax payments throughout the year. This can be a huge problem for those who are unable to pay their liability.
It’s always better to pay taxes on or before the April due date, than have to pay IRS penalties and interest because you are late.
Payment options to consider
- Family Loan – Obtaining a loan from a relative or friend is an excellent option. This is because this type of loan generally costs you less interest.
- Home Equity Loans and HELOCs – Use the equity in your home. That is, you can use the difference between your home’s value and your mortgage balance—as collateral. Home equity loans are secured against the equity value of your home. This allows home equity loans to offer extremely competitive interest rates—usually close to those of first mortgages. Compared with unsecured borrowing sources, (like credit cards), you’ll be paying less in financing fees for the same loan amount. Unfortunately, obtaining these loans takes time. So if you think you may need a home equity loan, you should start the application process right away.
- Credit Card – Another option is to pay by credit card. You can use one of the service providers that work with the IRS. Since the IRS won’t pay fees charged by the credit card company, you will be responsible for any “convenience fees”. In addition, you’ll also pay the credit card interest rates.
- Tap a Retirement Account – This is possibly the worst option for obtaining funds to pay your taxes. Why? Because by digging into your retirement, you are jeopardizing your future. In addition, the distributions are generally taxable at your highest bracket, which adds more taxes to your existing problem. Lastly, if you are under age 59½, the withdrawal is also subject to a 10% early withdrawal penalty.
Additional Payment Options with the IRS
- Short-Term Payment Plan – If you can fully pay the tax owed within 180 days and owe less than a total of $100,000 you can apply for a short-term payment plan online at the IRS website. You won’t be charged a set-up fee, but will still have to pay penalties and interest until the balance owed is fully paid. Setup fees will be charged if you apply for a payment plan by phone, mail, or in-person instead of online.
- IRS Installment Agreement – Owe the IRS $50,000 or less? You may qualify for a streamlined installment agreement. This is where you can make monthly payments for up to six years. You will still be subject to the late payment penalty, but it will be reduced by half. Interest will also be charged at the current rate. There is a user fee to set up the payment plan. However, the IRS generally waives the fee for low-income taxpayers who agree to make electronic debit payments. In making the agreement, a taxpayer agrees to keep all future years’ tax obligations current. But if the taxpayer does not make payments on time or has an outstanding past due amount in a future year they will be in default of their agreement and the IRS has the option of taking enforcement actions to collect the entire amount owed. Taxpayers seeking installment agreements exceeding $50,000 will need to prove both their financial condition and need. To do so, they can providing the IRS with a Collection Information Statement (financial statements). Taxpayers may also pay down their balance due to $50,000 or less to take advantage of the streamlined option.
Do not consider the following as payment options!
Filing Extensions – Don’t mistake the ability to apply for an extension of time to file your tax return as also being an extension to pay any tax liability. It is not and does not grant you an extension of time to pay. The penalties and interest on the amount due will continue to apply as of the original due date of the return.
Enforced Collections – If the taxes cannot be paid timely, and the IRS is not notified why the taxes cannot be paid, the law requires that enforcement action be taken, which could include the following:
- Issuing a Notice of Levy on salary and other income, bank accounts or property (IRS can legally seize property to satisfy the tax debt)
- Assessing a Trust Fund Recovery Penalty for certain unpaid employment taxes.
- Issuing a Summons to the taxpayer or third parties to secure information to prepare unfiled tax returns or determine the taxpayer’s ability to pay.
Note: To collect delinquent tax debts, certain federal payments (vendor, OPM, SSA, federal salary, and federal employee travel) disbursed by the Department of the Treasury, Bureau of Fiscal Service (BFS)) may be subject to a levy through the Federal Payment Levy Program (FPLP).
New additional payment option with the IRS
Fresh Start Initiative – The IRS also has what is called the “Fresh Start” initiative to offer more flexible terms in its existing Offer-in-Compromise program which, under certain circumstances allows taxpayers to settle their tax debt for reduced amounts. This enables financially distressed taxpayers to clear up their tax problems faster than in the past. While resolving tax problems might previously have taken four or five years, taxpayers may now be able to resolve their problems in as little as two years.
If you have questions about the payment options or an offer-in-compromise, please call this office for assistance. Don’t just ignore your tax liability because that is the worst thing you can do.
Video Tips: Can’t Pay Your Taxes? Watch for options.
