Maybe last year you sold a home or sold off a large amount of investments that had greatly grown in value. Perhaps your job is in sales, and because of a super successful year and commission compensation, your take-home pay had an unexpected and very big increase, or your annual bonus was much more than you had anticipated. Whatever the reason for the major positive change in assets and income, you realize that the federal taxes that you need to pay the U.S. Internal Revenue Service (IRS) this year may be more than the cash you have on hand, and very likely will bust your budget.
Paying big taxes can be, well, taxing, but payments can be extended
What do you do now? Well, talking to an experienced tax professional before taking any other action may be a smart move, and they might be on staff at a local financial institution.
If you can't pay the total amount, the IRS recommends in its Publication 4849 that you pay as much as possible to reduce the interest accumulating on the taxes you owe, as the government does charge interest (and sometimes penalties and fees) on unpaid debts. If additional funds are required, it may be possible to finance some or all of your tax liability through loans, such as a home equity or personal loan from a financial institution; these types of loans should be thoroughly researched to determine if they are appropriate to the tax filer’s situation. The IRS also offers some options for payment if the full amount of taxes due cannot be paid at once.
Because not everyone can pay their entire federal taxes by the filing deadline, the IRS offers qualified filers the ability to apply for a payment plan (sometimes called an installment agreement, or IA), using their online portal. If approved, the installment agreement will allow qualified filers to pay off an outstanding tax balance over time. A payment plan is an agreement with the IRS to pay the taxes you owe within an extended timeframe.
To apply for a payment plan, the IRS directs a filer to complete and submit an online application or submit a phone or mail application. The IRS indicates that applications submitted online will receive a fairly quick notification from the IRS if their payment plan has been approved without having to call or write to the IRS to provide more information or try to work out different plan details. According the IRS, online payment plans can be processed more quickly than requests submitted with electronically filed tax returns.
So…what are these tax payment plans?
The IRS website indicates there are two versions of IRS online payment plans for spreading out tax payments over time. The versions are:
- The short-term payment plan. For the short-term plan, the payment period is 120 days (approximately four months) or less, and the total amount owed must be less than $100,000 in combined tax, penalties and interest. While the payment is delayed, the entire amount must be paid at the end of the period.
- The long-term payment plan. With the long-term plan, the payment period extends to longer than 120 days, is paid in monthly installments, and the amount owed must be less than $50,000 in combined tax, penalties and interest. If the IRS approves a filer’s long-term online payment plan (installment agreement), an additional setup fee may be charged depending on the filer’s income. The IRS utilizes the setup fees to cover the cost of processing installment agreements.
The IRS directs individuals to apply for a payment plan using the Online Payment Agreement application or by calling the IRS at 800-829-1040 (for individuals). The IRS has specific hours of telephone assistance availability.
Possible tax payment plan modifications
If a filer already has a payment plan, the IRS website indicates they may also qualify to use the online payment plan option to revise their existing agreement. Plan changes that filers can make online include revising payment dates, payment amounts and banking information for Direct Debit Installment Agreements; this type of agreement allows the IRS to be paid directly from a financial account. If a filer doesn’t qualify for an online payment plan, then the IRS website indicates they may also request to receive an installment agreement by submitting Form 9465 with the IRS. If the IRS approves their IA, then an extra setup fee may apply depending on the taxpayer’s income. The IRS has more information on tax payment options available to filers.
There are a number of IRS rules and regulations affecting being accepted or rejected for an installment agreement, the length of debt collection periods, the penalties for taxpayers defaulting on payments, and what happens if the IRS decides to terminate an IA. To better understand these details, it’s very important to contact a tax advisor or the IRS for more information and possible payment options.
Looking for some financial advice that’s tax free?
For more helpful financial information, check out the free Delta Community Financial Education Center webinars on a range of money-related topics. You can visit the Financial Education Center's Events & Seminars page to register for its no-cost, on-demand webinars. The Credit Union's blog has more information that could be educational and helpful:
