Ways to Pay Off a Big Tax Bill

Bankrate.com

Some people ignore their tax responsibilities because they don't have enough money to pay their IRS bill. Not a good idea.

If you don't file a return, you'll ultimately make matters worse. The IRS assesses a failure-to-file penalty as well as one for not paying your bill. The fees are reminiscent of loan-shark rates, assessed each month at a rate of 5 percent of your tax bill (4.5 percent late-filing fee plus 0.5 percent late-payment penalty). As the months roll by, these fees can ultimately reach up to 47.5 percent of your tax bill. Ouch!

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Understanding Your Tax Bracket
So your best move is to file the forms and pay as much of your bill as you can. You'll still face the failure-to-pay penalty each month your bill is outstanding, but it's only 0.5 percent of the amount you owe. With that out of the way, then it's time to look at other payment options.

Pay with plastic

Like most other creditors, Uncle Sam accepts credit cards. Two private firms, Official Payments and Link2Gov, have contracted with the IRS to process charged tax payments. Both accept American Express, Discover, MasterCard or Visa. You can use your credit card regardless of whether you file by mail or electronically.

While handy, the credit option does have other costs. Both companies collect a fee of around 2.5 percent of your payment amount.

You also need to handle your credit card account wisely. The payment to the IRS will add to your account's balance; if you don't pay it off in full, additional interest charges by the card issuer will accrue.

Arrange an installment plan

If this is the first time you've had trouble meeting your tax obligation, set up an installment payment plan with the IRS by filing Form 9465.

The tax agency even allows you some leeway in establishing payment terms (e.g., monthly payment amount, due date) that fit your financial situation. In some cases, the IRS also allows installment plans for partial payment of due taxes.

The installment plan, however, is not painless.

You must pay off your IRS loan in at least three years.

Most taxpayers will be charged a one-time fee of $105; it's reduced if you set up direct debit payment or make less than a certain income level.

And, as with any such loan, your outstanding balance is subject to interest charges.

Get more time

In some situations, you might qualify for more time to pay, as long as you can convince the IRS that the delay will help you ultimately fulfill your tax obligation.

If you qualify, you'll get between 30 days to 120 days to pay your due tax. You'll also generally pay less in penalties and interest than you would if you paid your taxes via an installment agreement.

Request a short-term extension of time to pay by filing an Online Payment Agreement application or by calling 1-800-829-1040.

Make a tax deal

In some cases, the IRS might be willing to accept an offer in compromise, or an OIC. This is a lump-sum payment you offer to make that is less than the total amount of tax you owe.

The IRS sometimes agrees to smaller payments so that it will get at least some tax payments more quickly and without years of costly collection efforts.

An OIC is not simply a haggling technique to reduce your bill. The key to a successful offer is to propose an amount that reasonably reflects your ability to pay. To discourage taxpayers from making an offer just to stall payment, you must include a $150 application fee with the OIC request. If your offer is accepted, the fee will go toward your new payment amount.

The IRS reviews an applicant's financial situation and future income potential to determine whether an offer is appropriate. In most cases, the decision is no. The IRS says that since the OIC program was designed for taxpayers in extreme financial duress, few individuals qualify under terms they would like.

If, however, you believe your situation would meet the requirements, you can get detailed information in IRS booklet Offer in Compromise, Form 656.

Whichever tax payment method you choose, don't delay. Putting off your filing and payment of taxes will only compound your financial and tax problems.

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