Many people look forward to tax refunds each year, but unfortunately, sometimes you may find that you owe money. If you can't pay right away, you have a few options after you've acknowledged your obligation by filing your tax return. You will receive a letter from the IRS stating the amount due, penalties, interest and a phone number to call for making payments or discussing payment options.
File Your Return
If you owe money on your taxes, the IRS knows that you owe, and the amount. Employers must file the information they provide on your W-2 forms with the IRS. If you make enough money from independent contract work to require a 1099-MISC from a business, the IRS has that information, too. While the IRS prefers that you pay the money you owe on time, you must also file your tax return on time. Penalties for money owed when you do not file your return on time are greater than if you file the return, but don't enclose all the money you owe. If you can afford to pay any money at tax time, paying even a small amount is better than no money at all.
Consider using a credit card to pay the IRS. Penalties and interest capitalize from the first day that your tax payment is late. Depending on how much you owe, the fees can quickly surpass interest charged to you by your credit card company. Additional options include taking out a home equity line of credit if you are a homeowner, as well as asking relatives and friends for a loan. Keep in mind that while the IRS does have payment deferral options available, it charges fees to establish these services. The agency assesses those fees on top of your interest and penalties. An uncomfortable phone call to Aunt Edna might not hurt as much as those fees.
If you owe less than $25,000 in combined tax, interest and penalties, and believe you can pay in full if you have a little more time, you might receive a short-term extension on your payment. If approved, this extension is for up to 120 days from the date that you apply. As of February 2011, there is no fee assessed for short-term extensions; however, interest and penalties still apply. Also, if you fail to pay the amount in full within your extension period, the IRS may move forward with collection proceedings to retrieve the full amount.
If you cannot pay all money due in full within 120 days, consider asking for a monthly payment plan. As long as you have filed all your tax returns, you may be eligible. However, as of February 2011, the IRS charges a $53 fee to establish a payment plan that automatically deducts money from your bank account. It assesses a $102 fee if you establish any other payment plan. If you have sufficiently restricted income, the IRS may instead charge a reduced rate of $43 for either payment plan. The IRS will assess the appropriate fee when you apply for the plan, either online or by phone.
- TAXES image by Marie-ThÃ©rÃ¨se GUIHAL from Fotolia.com