CARL WATTS & ASSOCIATES

April 13, 2015

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Do You Owe Money
to the IRS?
Nobody wants to be in that situation, we get that, but what are your best options if you do owe taxes to the IRS and you cannot pay the full amount?

First of all, make sure that you file your return and that you do it on time. Not filing a tax return is not a good option. The IRS knows that you owe taxes, they have copies of your W-2s and 1099s whether you file a tax return or not.

The difference is that by filing a tax return on time (on or before April 15, or during the six months extension after filing Form 4868 requesting an extension of time to file) you acknowledge your obligation and you avoid penalties for not filing your return on time.

The failure-to-file penalty (also known as the delinquency penalty) runs at the rate of 5% per month (or partial month) of lateness to a maximum of 25%. If you file an extension for your filing due date, you are not filing late unless you miss the extended due date. The failure-to-file penalty is based on the amount required to be shown on the return, and not just the amount shown as due.

Additionally, if you are more than 60 days late in filing your taxes and owe money to the IRS, they can assess a minimum penalty that can range from $100-$135, or up to 100% of the taxes owed.

Second of all, the IRS expects you to pay some of the amount owed with filing your taxes. You should pay as much as you can afford either online, by phone, or by check or money order so as to reduce interest charges and a late payment penalty. (Go to the IRS webpage for all electronic payment options.)

Your best option is to ask for additional time to pay.


Based on your circumstances, you may be granted a short additional time to pay your tax in full either through the Online Payment Agreement application or by calling 1-800-829-1040. If you are granted an additional 60 to 120 days to pay the tax in full, you will generally pay less in penalties and interest than if the debt were repaid through an installment agreement over a greater period of time.

There is no user fee for an extension request; however, interest and any applicable penalties will continue to accrue until your liability is paid in full.

If the additional time to pay is not helpful to your particular situation, you can opt for an installment agreement.

The IRS advises that, before requesting an installment agreement, you should consider other less costly alternatives, such as getting a bank loan or using available credit on a credit card.

The IRS installment agreement allows your full payment of the tax debt in smaller, more manageable amounts. Be warned though that penalties and interest charges continue to accrue with the Internal Revenue Service until the tax debt is completely resolved and no further tax liability is owed.

The failure to pay penalty is one-half of one percent for each month, or part of a month, up to a maximum of 25% on the amount of tax that remains as unpaid from the due date of the return until paid in full. If you file your return by its due date and request an installment agreement, the one-half of one percent rate decreases to one-quarter of one percent for any month in which an installment agreement is in effect. You should be aware that the IRS applies payments to the tax first, then any penalty, then to interest (your bill will show the accrued amount of penalties up to the date of the notice and is not the penalty amount charged each month).

Interest accrues on any unpaid tax from the due date of the return until the date of payment. The interest rate is determined quarterly and is the federal short-term rate plus 3 percent. (The short term Applicable Federal Rate (AFR) for April 2015 is 0.48%).

There are several types of Installment Agreements. We will deal here with the most common types.

The Guaranteed Installment Agreements is the type of payment plan that you may qualify for as an individual taxpayer if:

The amount of tax you owe (not counting interest and penalties) is less than $10,000;
You (and your spouse, if you file jointly) have filed and paid all taxes due for the previous 5 years;
Neither you (nor your spouse, if you filed jointly) have had an installment agreement with the IRS in the previous 5 years;
  • You can pay the full amount within 3 years;
  • You agree to pay the liability before the period for collecting the tax expires; and
  • You comply with the tax laws during agreement.

There are two types of Streamlined Installment Agreements, depending on how much and what type of tax you owe. For both types, you must pay the debt in full within 72 months (6 years).

There is one installment agreement for an assessed tax liability under $25,000 (you must include all assessed tax, penalty and interest in computing the balance due) which is available to individuals, businesses that are still operating, and businesses that have gone out of business.

There is another installment agreement available for a tax liability from $25,001 to $50,000 (including all assessed tax, penalty and interest) which is available to individuals and out-of-business sole proprietors. To get this type of agreement, you must pay through either a direct debit or payroll deduction agreement. 

The initial fee for setting up an installment agreement varies depending on the payment method you choose.

The IRS charges a one-time installment agreement user fee of $120.00 when you enter into a standard installment agreement or a payroll deduction installment agreement.




If you choose to pay through a direct debit from your bank account, the user fee is $52.00.

Taxpayers with income at or below 250% of the Department of Health and Human Resources poverty guidelines may apply for a reduced user fee of $43.00. You can request the reduced fee by using Form 13844, Application For Reduced User Fee For Installment Agreements.

The user fee for restructuring or reinstating an established installment agreement is $50.00 regardless of income levels or method of payment.

You can request an installment agreement online or you can complete Form 9465, Installment Agreement Request, and submit it with all required documents to the address in the instructions.

If the IRS accepts your request for an agreement, be sure you follow the instructions and make your payments on time every month. You should also be aware that even with an installment agreement, your future refunds will be applied to your tax debt until it is paid in full.

Your monthly payment should be based on your ability to pay and it should be an amount that you can pay each month to avoid defaulting.

The IRS offers several options for making monthly payments, such as:

Direct debit from your bank account;
Payroll deduction from your employer;
Payment via check or money order;
Payment by Electronic Federal Tax Payment System (EFTPS);
Payment by credit card via phone or Internet; or
Payment by Online Payment Agreement (OPA).

After each payment, you will receive from the IRS a notice showing the remaining amount you owe, and the due date and amount of your next payment.

If you choose to have your payments automatically withdrawn from your checking account, you will not receive a notice, instead, your bank statement will be your record of payment.

The IRS will also send you an annual statement showing the amount you owed at the beginning of the year, all payments made during the year, and the amount you owe at the end of the year.

After an installment agreement is approved, you can any time submit a request to modify either the amount or the due date, or terminate it.

Even if all these tools are available to you without the assistance of a professional, it is still our advice to contact a tax pro who may be able to come up with a better payment plan and give you other specialized advice to enable you to see the light at the end of your financial tunnel again.
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