Consumers who owe the IRS a large amount of taxes can either pay off their delinquent bill with a credit card or face monthly payments.
The first step for taxpayers who have not sent in a return yet is to request an extension by filing form 4868. While the extension moves the filing until October 17, any payments must be made by April 18 or consumers face paying penalties and interest, which can add up quickly and increase the amount they already owe to Uncle Sam.
Obtaining a payment plan from the IRS is a common option chosen by many taxpayers. Until the balance is eliminated, you face accruing additional penalties and interest fees. Using your credit card to pay off the debt has its caveats, because the IRS charges additional fees.
“Considering the additional costs from a delinquent tax bill, you might also consider using your credit card to pay it,” said Sarah Nieschalk, an enrolled agent at Tax Defense Network, a Jacksonville, Fla.-based tax resolution company. “You’ll want to compare your creditor’s interest rates with those charged by the IRS.
Payment Plan With IRS
Establishing a payment plan with the IRS can be conducted online “in a matter of minutes” by filling out form 9465 and including it with the tax return or completing the online agreement, the agency said. Taxpayers who owe less than $50,000 can pay their taxes for up to 72 months. The online agreement means consumers do not need to contact the IRS.
Taxpayers who can pay off the entire amount owed in 120 days do not have to incur additional fees, just the penalty and interest for not paying by April 18, said Mark Steber, chief tax officer at Jackson Hewitt Tax Service, a Parsippany, N.J.-based tax prep company.
“Remember, the penalty is assessed monthly on the unpaid balance and interest is compounded daily and added to the account each month,” he said.
Stretching out the payments means shelling out more money and paying even more interest. The cost of a traditional installment agreement is $120 unless your income is below certain amounts. This cost can be lowered to $52 if you choose to allow the IRS to conduct a direct payment from your account each month.
An option for struggling taxpayers is to seek an offer-in-compromise, but it should not be the first route that you seek. After the IRS examines your ability to pay by assessing your income and assets, the tax liabilities could be settled for a lower amount.
Once you are past the filing deadline of April 18, the balance you owe is considered a tax debt and ignoring it can result in collection action from the IRS such as a wage or bank levy,” said Nieschalk.
“Remember that any tax bill takes precedence over future refunds,” she said. “In other words, if you’re due money back next tax season, any delinquent tax bill will be satisfied before you see a dime.”
Fees Are Costly
The penalties assessed by the IRS are plentiful if you file late, including late filing and late paying penalties.
If you live in a state where you have to file state taxes and miss the deadline, plan for paying additional late payment and late filing penalties in addition to the federal fees, said Grafton “Cap” Willey, a managing director of CBIZ MHM, a Cleveland-based accounting and professional services provider.
Missing the deadline without filing for an extension means you are likely facing a failure-to-file penalty which is 5% of unpaid taxes each month, not to exceed 25%, said Steber.
Procrastinators who file 60 days or longer after the due date should plan to pay a minimum penalty of $135 or 100% of the unpaid tax, whichever is lower.
The IRS can also assess a failure-to-pay penalty which starts accruing the day after taxes are due.
“This penalty is much less costly and starts at 0.5% of unpaid taxes each month, not to exceed 25%,” Steber said.
While the IRS allows consumers to pay off their debt with a credit card, they charge a convenience fee of 1.8% to 3.95% depending on the type of card, he said.
“At the end of the day, you may ultimately just need to decide who you’d rather owe - your credit card company or Uncle Sam,” said Nieschalk. “If you have a tax debt, your best course of action is to resolve it quickly and without error. The type of resolution you obtain should also fit within your budget, allowing you to satisfy your debt without creating a financial burden.”