Dollars & Sense
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. For the 2003 filing season, 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) 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.
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 agency that you can't come up with that much all at once, the IRS 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.
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.
But if your return was filed on time and you applied for the payment program before you got a levy notice, the penalty drops from 0.5 percent of the balance due each month to a 0.25 percent rate when the IRS approves your request.
Let's make a deal
What if you can't pay your tax bill off in three years or five or ...?
Then it may be time to negotiate.
The IRS may be willing to accept an Offer in Compromise, a lump sum payment you offer to pay 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 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 also must 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.