Tax Bill Too Big? IRS Offers Payment Options

If this year's tax filing deadline will be a "pay" day for you and you don't have the cash, the Internal Revenue Service gives you several payment options.

First, even if you can't pay your tax bill, go ahead and file your return on time. This way you'll avoid the IRS's failure-to-file penalty of 5 percent per month (up to a maximum of 25 percent) of your balance due. 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.

Paying with plastic
Now take a look at what you owe.

Some taxpayers find they can pay part or all of their tax bill by putting it on a credit card. The IRS has awarded contracts to two companies to accept credit card charges: Official Payments and Link2Gov. Both accept payments from electronic as well as paper filers, either via phone or the Internet. They take American Express, Discover, MasterCard or VISA.

Remember, however, that while this may get you off the hook with Uncle Sam, it will cost you in other ways. Each company has its own fee schedule (generally 2.49 percent of your tax bill or a minimum $1) connected with charged payments.

And if you don't pay off your credit card in full, you'll start racking up interest charges on your account. In some cases, however, your credit card interest charges might come to less than IRS penalties and interest you'd owe if you don't pay on time. So before you decide to pay with plastic, run the numbers so that you don't pay anyone, neither Uncle Sam nor your credit card company, any more than necessary.

Installment plans
If your tax bill is too large for a credit card, the IRS is willing to take monthly payments. You even get to pick your monthly payment amount and the day it will be due.

In fact, if you've previously filed (and paid) taxes on time, your tax bill is less than $10,000 and you convince the IRS that you can't come up with that much all at once, the agency can't turn down your request. Your installment plan, however, must pay off the due tax in at least three years. To get the program going, attach Form 9465, Installment Agreement Request, to the front of your tax return.

This year the IRS is also offering financially-strapped taxpayers the option to use an installment plan to make partial payments of tax liability. The agency had previously allowed partial installment payments, but stopped the practice in 1998 when an IRS attorney raised questions about the IRS's authority to accept such payments without statutory authority. Congress officially granted the IRS the power to resume partial payment installment agreements as part of the American Jobs Creation Act of 2004 that became law last October.

While the IRS argued for legislative reinstatement of the partial-payment option, approval is not automatic. Taxpayers who request a partial-payment installment agreement must provide detailed financial information, including data on equity assets, that the IRS will verify. Plus, the IRS will review the arrangement every two years to determine whether the taxpayer's financial status has changed; and if it has improved, the amount of installment payments could increase or the agreement could be terminated.

Regardless of whether you pay your tax bill in full or partially via an installment agreement, keep in mind that paying over time, even to Uncle Sam, will cost you more. The IRS charges a one-time $43 fee to process the payment plan (you'll be billed with your first payment) and the agency continues to add penalties and interest to your unpaid tax bill. The IRS may also file a federal tax lien against you, which will be released when you pay off your installment loan.

Let's make a deal
What if you can't pay off your tax bill, in whole or part, in three years or five years or ...? Then it may be time to negotiate.

The IRS might be willing to accept an offer in compromise, or an OIC; a lump sum payment you offer to make that is less than the total amount of tax you owe. In these cases, the agency hopes to get some taxpayer money sooner than it would after years of costly collection efforts.

The key here is that the amount must reasonably reflect your ability to pay. It's not merely haggling to get your tax bill reduced. In fact, the IRS is stepping up its efforts to weed out those taxpayers who use the offer-in-compromise route merely to delay paying their bills. Since Nov. 1, 2003, any taxpayer making a reduced payment offer has had to include a $150 application fee with the request. The agency hopes this means that it will hear only from folks who truly need the negotiated bill.

The IRS will review your financial situation and future income potential to determine whether your offer is appropriate. Be forewarned, however. Uncle Sam says this program was designed only for extreme cases and very few filers will qualify for the program under the terms they would like. If you believe your situation does indeed meet the requirements, you need to file two forms: Form 656, Offer in Compromise, and Form 433-A, Collection Information Statement.

You must also submit the $150 application fee along with Form 656-A, Offer in Compromise Application Fee Instructions and Certification. (The fee is waived for filers who have little or no income. They can claim a poverty exception when they file Form 656-A.) If you don't send this form along with your fee, the IRS will return your offer application "without further consideration." If you submit everything as required and the IRS determines you do not meet the qualifications, and rejects your offer, you are out $150. But if the agency accepts your offer, your fee will go toward your new payment amount.

Regardless of which tax bill-payment method you choose, make your decision now. Delay will only compound your financial and tax problems. And try to pay something. By sending in any amount when you file your return, at least you'll ultimately reduce your interest and penalty charges.