For clients who filed their taxes on time but didn’t pay all that they owed, the taxman cometh. The IRS is mailing out letters in June and July, and offering plenty of payment options.
Here’s a snapshot:
- Direct Pay with a bank account takes money directly from a checking or savings account. There’s no charge.
- The Electronic Federal Tax Payment System allows payment by phone or online, and also is free.
- Debit/Credit cards can be used but the processing company may charge a fee (the IRS doesn’t, though). See the link for various fees.
- Good ol’ checks or money orders payable to the U.S. Treasury can be submitted in person or by mail.
- Cash payments can be made at some IRS offices or at PayNearMe locations. There are certain restrictions.
For taxpayers who need installment plans, the IRS offers these four options:
- Online Pay Agreement: Individual taxpayers who owe $50,000 or less in combined income tax, penalties and interest; and businesses that owe $25,000 or less in payroll tax and have filed all tax returns may qualify for this option, which is generally easy to set up.
- Installment Agreement: These can be paid by direct deposit from a bank account or a payroll deduction. They help taxpayers avoid default on their agreements, and avoid the hassle of mail and postage. Taxpayers who don’t qualify for a payment agreement may still pay by installment. Certain fees apply.
- Delaying Collection: If the IRS determines a taxpayer is unable to pay, the agency may delay collecting what’s owed until the taxpayer’s financial situation improves. The IRS makes a point of noting that the debt doesn’t go away.
- Offer in Compromise: Taxpayers can use the link to determine their eligibility to settle their tax bill for less than they owe by submitting an offer in compromise. They will enter their financial information and tax filing status to calculate a preliminary payment amount. The IRS makes its final decision based on the completed application and its own investigation. Taxpayers who can pay in full can still file an offer in compromise. Partnerships, corporations, residents in a U.S. territory or another country, or military personnel using an APO or FPO address can’t use the pre-qualifier. Instead, they should use the application in the Offer in Compromise Booklet[linkto]https://www.irs.gov/pub/irs-pdf/f656b.pdf.
The IRS notes that loans also are an option, and the loan costs may be less than the interest and penalties the agency has to charge by federal law.
Despite the various payment options, the agency may still file a federal tax lien. Federal law requires the lien to establish priority as a creditor over other creditors in certain situations, such as bankruptcy proceedings or real estate sales. Once that lien is filed, it may appear on a taxpayer’s credit report and harm their credit rating.
So, taxpayers should make a point of settling their tax liability before a lien is filed. Otherwise, they’ll be liable not just for taxes but also penalties, interest and recording fees.
One way taxpayers can avoid this whole mess is to make sure they have the proper tax withheld. Use the IRS Withholding Calculator to determine that -- especially since the Tax Cuts and Jobs Act upended the way tax is calculated for most taxpayers, the IRS notes.
About Terry Sheridan
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.