TAX TIP No. 71
Tax bill too big? IRS offers payment options
While the IRS argued for legislative
reinstatement of the partial-payment option, approval
is not automatic. Taxpayers who request a partial-payment
installment agreement must provide detailed financial
information, including data on equity assets, that the
IRS will verify. Plus, the IRS will review the arrangement
every two years to determine whether the taxpayer's
financial status has changed, and if it has improved,
the amount of installment payments could increase or
the agreement could be terminated.
Regardless of whether you pay your tax bill in full or partially via an installment agreement, keep in mind that paying over time, even to Uncle Sam, will cost you more. The IRS charges a one-time fee of $105 unless you arrange to have your installment payments made via direct debit from your bank account.
The fee drops to $52 for direct debit agreements. Some lower-income taxpayers could pay a reduced fee of $43, which was the previous user fee for all installment agreement applicants.
You'll be billed for any fee with your first payment. Plus, penalties and interest continue to accrue to your unpaid tax bill. The IRS may also file a federal tax lien against you, which will be released when you pay off your installment loan.
If you want to apply for an installment arrangement, the IRS now accepts online applications.
make a deal
What if you can't pay off your
tax bill, in whole or part, in three years or five years
or even longer? Then it might be time to negotiate.
The IRS might
be willing to accept an offer
in compromise, or OIC,
a lump-sum payment you offer
to make 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
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
taxpayers who use the OIC route
merely to delay paying their bills. Since Nov. 1, 2003,
any taxpayer making a reduced payment offer has needed
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 warned, however. Uncle
Sam says this program was designed only for extreme
cases, and few filers will qualify for the program
under the terms the IRS 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 must also
submit the $150 application
fee along with Form
656-A, Income Certification
for Offer in Compromise Application
Fee and Payment. (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.
Then the IRS wants even more upfront. Your offer must include a 20 percent payment for lump-sum cash payment offers or your first installment payment if you're seeking a periodic payment plan.
The IRS also
says it's willing
to work with taxpayers who are having a hard time
in this economy making their
payments, tax or otherwise.
The key is to call the IRS
and let the agency know you need
help meeting your tax obligations.
If you just ignore your bill,
the agency will continue to
assess penalties and interest
Regardless of which 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.
Updated: April 15, 2009