CARL WATTS & ASSOCIATES

April 21, 2014

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Owing Federal Taxes
For most people, the tax season is now over. They may be waiting for or already received a refund, or they may have paid taxes owed.

What if the amount of taxes you owe is more than you can pay? What are your options then?

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) first you acknowledge your obligation, and second you avoid penalties for not filing your return on time.

If you’re due a refund there’s no penalty if you file a late tax return. But if you owe taxes and you fail to file and pay on time, you’ll usually owe interest and penalties on the taxes you pay late.

So, the IRS advice is to file on time and pay as much as you can.  File on time to avoid a late filing penalty. Pay as much as you can to reduce interest charges and a late payment penalty. You can pay online, by phone, or by check or money order. Visit IRS.gov for electronic payment options.

Penalties for money owed when you do not file your return on time are greater than if you file the return, but don't enclose all the money you owe.

The failure-to-file penalty is usually much more than the failure-to-pay penalty. In most cases, it’s 10 times more, so if you can’t pay what you owe by the due date, you should still file your tax return on time and pay as much as you can.

The failure-to-file penalty is normally 5 percent of the unpaid taxes for each month or part of a month that a tax return is late. It will not exceed 25 percent of your unpaid taxes.

If you file your return more than 60 days after the due date or extended due date, the minimum penalty for late filing is the smaller of $135 or 100 percent of the unpaid tax.

The failure-to-pay penalty is generally 0.5 percent per month of your unpaid taxes. It applies for each month or part of a month your taxes remain unpaid and starts accruing the day after taxes are due. It can build up to as much as 25 percent of your unpaid taxes.

If the 5 percent failure-to-file penalty and the 0.5 percent failure-to-pay penalty both apply in any month, the maximum penalty amount charged for that month is 5 percent.

If you requested an extension of time to file your income tax return by the tax due date and paid at least 90 percent of the taxes you owe, you may not face a failure-to-pay penalty. However, you must pay the remaining balance by the extended due date. You will owe interest on any taxes you pay after the April 15 due date.

If you can't pay taxes due right away, you have a few options after you've acknowledged your obligation by filing your tax return. You will receive a letter from the IRS stating the amount due, penalties, interest and a phone number to call for making payments or discussing payment options.

If you cannot pay all money due in full within 120 days, consider asking for a monthly payment plan, also called installment agreement. As long as you have filed all your tax returns, you may be eligible.


If you owe $50,000 or less, you can apply using the IRS Online Payment Agreement application. It’s quick and easy. If approved, IRS will notify you immediately.


You can arrange to make your payments by direct debit. This type of payment plan helps avoid missed payments and may help avoid a tax lien that would damage your credit.

You may also apply using IRS Form 9465, Installment Agreement Request. If you owe more than $50,000, you must also complete Form 433F, Collection Information Statement.

For approved payment plans the one-time user fee is $105 for standard and payroll deduction agreements. The direct debit agreement fee is $52. The fee is $43 if your income is below a certain level.

In any case, if you get a bill from the IRS, contact them right away to talk about payment options. The IRS may take collection action if you ignore the bill, which will only make things worse.

As with all your dealings with the IRS, enrolling help from a tax professional is always your best choice.
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