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What to Do When You Owe Taxes to the IRS

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Owing a debt you can’t pay is a situation nobody wants to find themselves in, and it can be especially stressful when that debt is owed to the IRS. Many people fear the IRS and not without reason.

The IRS has collection powers that many creditors don’t have, including garnishing wages, seizing bank accounts, and even putting liens on property. Yet many people occasionally face a situation where they have a tax debt they just can’t pay. There are many options for dealing with tax debt, but ignoring it and hoping it goes away is not one of them. If you find yourself in this unfortunate situation, check out these tips for facing tax debts.

Filing for a filing extension will not give you more time to pay back the debt

Some people mistakenly believe that if they extend their tax return, they’ll have additional time to pay the amount due with their return. But an extension is just an extension of time to file, not to pay. You are still obligated to calculate the amount you’ll owe and pay that by April 15, even if you’re not yet ready to file.

Pay as much of the debt as possible by the filing deadline

When you file an extension but don’t pay 90% of the tax you owe for that year, the IRS will charge a failure-to-pay penalty. The penalty is generally 0.5% per month on the balance of your unpaid balance, and it starts accruing the day after taxes are due. It can grow to as much as 25% of your unpaid taxes.

In addition, interest will accrue on any unpaid tax from the due date of the return until you pay your balance in full. The interest rate is determined quarterly and is the federal short-term rate plus 3%.

If you can’t pay the amount you owe, filing your return without making a payment won’t avoid penalties and interest, but it’s important to know that filing an extension won’t help you avoid them either. Just file on time and pay as much as you can to reduce penalty and interest charges.

Now that you’ve filed your return and know how much tax you owe, it’s time to consider your options for paying the balance due.

How to pay your tax debt

By credit card

If you don’t have the money to pay the amount due immediately, the IRS does accept credit cards, but be wary of paying your tax debt with plastic. Although the IRS doesn’t charge a fee to pay by credit card, the company that processes your payment will charge a fee ranging from 1.87% to 2.00% of the payment amount. Plus, you’ll need to consider the interest your credit card company will charge until you pay off the balance.

The IRS will charge a far lower interest rate than your credit card, which means you can pay off the debt much quicker.

Enroll in an IRS repayment plan

Paying a tax debt via credit card may not be an option if the amount due exceeds your credit limit, or it may not be the best choice if your credit card has a high interest rate. In that case, you may be able to work out a payment arrangement with the IRS. Just be aware that your account will continue to accrue penalties and interest until the balance is paid in full.

Here are three types of IRS repayment plans:

Short-term extension to pay

If the amount you owe is relatively small and you believe you can pay it off within 120 days, call the IRS and ask for a short-term extension of time to pay. This is not a formal payment plan. The IRS will just make a note on your account that you’ve been granted additional time to pay the full amount. During this period, they will not take any collection action against you.

Installment agreement

If you aren’t able to pay your debt in full within 120 days, Scott Taylor, a CPA with Piercy Bowler Taylor & Kern in Las Vegas, Nev., recommends that you contact the IRS to arrange an installment agreement. An installment agreement is basically a monthly payment plan. You can apply online for an installment agreement if you owe $50,000 or less in combined tax, penalties, and interest. For balances over that amount, you will need to complete Form 9465 and Form 433-F and send them in by mail.

With an installment agreement, you decide how much money you will pay each month and on what date you’ll make the payment. As long as your debt will be paid off within three years and you owe less than $10,000, the IRS has to accept your payment plan.

Fees

Keep in mind that the IRS also charges user fees for installment agreements. “Unfortunately for taxpayers, the fees have gone up as of January 2017,” Taylor says. The cost to set up an installment agreement is $225. If you apply online and choose to have the monthly payments directly debited from a bank account, the fee drops to $31.

If your ability to pay the agreed upon amount changes later on, you’ll need to call the IRS immediately. When you miss a payment, your agreement goes into default and the IRS can start taking collection action. For example, if your agreement calls for a $300 payment and you lose your job and aren’t able to make the payment, call the IRS before you miss a payment. They may be able to reduce your monthly payment amount to reflect your current financial situation.

Partial payment installment agreement

What if you owe so much that you can’t pay it off in a reasonable period of time? In that case, you may be eligible for a partial payment installment agreement. Like a regular installment agreement, you will make regular, agreed upon payments for a set period of time. However, the payments will not pay off the entire debt. After the agreement period ends, the remaining debt will be forgiven.

As you can imagine, the IRS doesn’t take debt forgiveness lightly, so applying for a partial payment installment agreement is more complicated than applying for a regular installment agreement. Instead of letting you decide how much you can afford to pay each month, the IRS will calculate your monthly payment by taking into account your outstanding balance, the remaining statute of limitations for collecting the debt, and the reasonable potential of collection.

To request a partial payment installment agreement, it’s best to consult a tax professional with experience handling tax debts. Before the IRS approves a partial payment installment agreement, you will need to have filed all of your tax returns and be current on your income tax withholding or estimated payments.

How to settle your tax debt (offer in compromise)

You’ve probably heard the television commercials promising to help you “settle your tax debt for pennies on the dollar.” These ads refer to an offer in compromise (OIC), and they’re not as easy to get as those ads would have you believe.

With an OIC, you agree to a lump-sum or short-term payment plan to pay off a portion of your debt in exchange for the IRS forgiving the remainder of the debt.

To qualify, you must prove that you are unable to pay off the entire debt through an installment agreement or other means. It can be difficult to meet the income and asset guidelines to qualify for an OIC, so it’s best suited for taxpayers with low income and very few assets.

You can check to see if you are eligible for an OIC by using the IRS’s pre-qualifier tool. To apply, you’ll need to complete Form 656 and Form 433-A and submit them along with an application fee of $186. You’ll also be asked to provide documentation to support the financial information provided in the forms.

Again, it’s a good idea to get help from a tax professional with experience working with OICs to help you complete the forms and walk you through the complex process. Be wary of tax resolution firms making promises that sound too good to be true. Check with the Better Business Bureau and the state attorney general’s office for complaints before you pay a retainer.

Tax debt discharge

There is a 10-year statute of limitations on tax debt collection, so if you are having serious financial issues and can’t pay at all, letting that statute run out may be an option. To do this, you’ll need to get your tax debt in currently-not-collectible (CNC) status by demonstrating that you cannot pay both reasonable living expenses and your tax debt.

To request CNC status, the IRS will ask you to provide financial information on Form 433-A or Form 433-F and provide documentation to support amounts listed on the statement. If you have any assets that the IRS believes could be sold to pay your debt, they may not grant CNC status.

While your account is in CNC status, the IRS will not pursue collection, but if you are owed any tax refunds on returns filed while your account is in CNC status, the IRS may keep your refunds and apply them to your debt. They may also file a Notice of Federal Tax Lien, which can affect your credit score and your ability to sell your property.

The IRS will review your income annually to see if your situation has improved. If you maintain CNC status until the 10-year statute of limitations runs out, you may no longer be required to make payments, regardless of whether your financial situation improves later on.

What if you don’t agree with the amount due?

If you owe a lot more than you expected, take a moment to review your completed return carefully to look for errors. Make sure you didn’t accidentally enter the same income twice or forget an important deduction, and make sure you answered all of the questions correctly. One missed question or checkbox can cause you to miss out on valuable tax benefits. Also, compare this year’s return to last year. If your tax bill went up drastically even though your situation hasn’t really changed, find out why.

Occasionally, taxpayers receive notices from the IRS indicating an amount due that they don’t agree with. Don’t feel like you have to pay an amount you don’t believe you owe just because it comes on IRS letterhead. Taylor says each notice will include a section detailing how to respond.

“The IRS may have made an error in matching up 1099s or W-2s, and the amount owed needs to be adjusted,” he says, and he recommends that you send a letter via certified mail in response, with a full explanation. “A CPA can help you with this letter, but if you follow the guidelines provided by the IRS, you should be able to respond appropriately and have the fees resolved or adjusted.”

IRS collection enforcement

If your taxes are not paid on time and you do not communicate with the IRS, they can issue a Notice of Levy. An IRS levy permits the legal seizure of your property. They may garnish your wages or seize your bank account, vehicles, real estate, or other personal property to satisfy the debt.

Taylor says IRS notices will only come via U.S. mail, so be sure you check your mail and read all IRS notices. “It seems like a simple thing,” Taylor says, “but with many financial and personal transactions occurring online, many people ignore their mailbox for long periods of time.”

Whatever your situation, Taylor says it’s important to remain in contact with the IRS to show your intent is to pay your debt. “Don’t ever ignore IRS notices,” Taylor says. “The IRS is willing to coordinate payment plans, and the consequences of ignoring them are always difficult to adjust.”

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Janet Berry-Johnson
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Janet Berry-Johnson is a writer at MagnifyMoney. You can email Janet here

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Don’t Use Your Tax Refund as Forced Savings

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Internal Revenue Service IRS building in Washington DC forced savings
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Getting a fat tax refund from the IRS may put a big smile on your face. But before you get too excited, heed the words of hip-hop legend the Notorious B.I.G.: mo’ money, mo’ problems.

A big refund check isn’t a sign you’re getting free money from Uncle Sam—in fact, quite the opposite. It means that throughout the year, you’ve granted the government an interest-free loan from your paycheck, and now you’re getting the principal back in one lump sum. You’re not making any more money than if you had taken that cash, buried it in your yard and dug it up in April. Thankfully, there’s a better way.

Don’t use the IRS as a forced savings account

Most Americans only think about their federal income tax once a year, ahead of the April 15 tax deadline. But it’s important to understand that you’re paying income taxes with every pay period. For workers receiving wages, state and federal income tax is withheld by employers with each paycheck (It gets even more complicated if you’re self-employed or a freelancer; you’ll usually have to pay an estimated quarterly tax).

Your employer calculates how much of your paycheck to withhold, ensuring you pay your annual tax bill over time, based on the information you filled out on your W-4 when you start a job. Many people fill out the form without a second thought, but it has an impact on your financial life because it determines the size of your withholding.

On your W-4, you claim a certain number of tax allowances. The more allowances you claim, the less money is withheld from your paycheck. The general rule is that you can claim one allowance for the following:

  • Yourself
  • Your spouse
  • Any dependents you can claim (this will usually be your children, but can be anyone who qualifies under IRS rules)

This list above provides a good baseline for claiming allowances, but maxing out your claims isn’t as simple as taking a tally of everyone at the dinner table.

Claim the right amount of allowances to avoid overpaying

When claiming allowances on your W-4, your goal should be to land on the amount that matches your federal tax liability—how much you owe the government in taxes—as closely as possible. If you do it right, your tax liability should be divvied up precisely and paid off via withholding in each pay period. Get it right, and you won’t receive a tax refund.

How do you determine the correct amount of allowances to claim to avoid the ritual of forced savings and refund checks? The IRS provides personal worksheets with the W-4 form that can help you calculate the maximum amount of allowances you’re entitled to.

Answer the following questions in order to figure out how many allowances you should claim.

Should I claim the Child Tax Credit?

As alluded to earlier, claiming just one allowance for each of your children may mean you aren’t taking all the allowances you could. If you’re claiming a tax credit for each child, the number of allowances you claim for each child depends on your total income, and if you’re filing as a single person or married filing jointly.

Filing SingleMarried Filing JointlyNumber of Allowances Per Child
Less than $71,201Less than $103,351

4

$71,201 to $179,050$103,351 to $345,850

2

$179,051 to $200,000$345,851 to $400,000

1

Higher than $200,000Higher than $400,000

0

You should also take into account tax credits you will claim for eligible dependents who aren’t your children, which affects the number of allowances you can claim.

Filing SingleMarried Filing JointlyNumber of Allowances Per Child
Less than $71,201Less than $103,351

1

$71,201 to $179,050$103,351 to $345,8501 for every 2 dependents ( if you only had one dependent, you would claim 0 allowances. If you had 2 dependents, you would claim 1 allowance)
Higher than $179,050Higher than $345,850

0

Do I have more than one job? Does my spouse work?

If you’ve fully embraced the cult of the side hustle — willingly or not — or if your spouse also works, and the combined income from all of these jobs exceeds $53,000, you may want to claim additional allowances. The Two Earners/Multiple Jobs worksheet that comes with the W-4 walks you through the many allowances you could claim, but in general the number of allowances you can claim is based on the wages you earn from your lowest-paying job.

Am I claiming itemized deductions?

The Tax Cuts and Jobs Act passed by Congress and signed into law by President Trump at the end of 2017 changed the calculus for many taxpayers who normally devote hours to claiming itemized deductions. “There will be a lot of disconnect this year for people who have relied on itemized deductions that are no longer deductible,” said Michael Goldfine, CPA based out of New York, NY.

The changes to the tax code in 2017 nearly doubled the standard deduction, from $6,350 to $12,000 for single filers (and from $12,700 to $24,000 for married couples filing jointly). This means it usually makes more financial sense to simply claim the standard deduction. If you do that, you wouldn’t claim an additional allowance on your W-4.

However, if you believe the value of itemized deductions you can claim exceeds what you would get with the standard deduction, then the amount greater than the standard deduction figures in to whether or not you should take another allowance.

What other deductions or adjustments should I claim?

You’ll also want to think long and hard about any income you’ve earned that’s not from wages and isn’t subject to federal withholding. Interest earned from bank accounts or dividend payments from stocks, for example, could all contribute to how many allowances you can claim. By filling out the Deductions, Adjustments and Additional Income worksheet with Form W-4, you can estimate the number of allowances this income entitles you to claim.

Don’t claim more allowances than you’re owed

While withholding too much and not claiming as many allowances as your circumstances allow gives the federal government an interest free loan, the opposite — claiming too many allowances and not withholding enough — isn’t ideal either.

If your employer doesn’t withhold enough money from your wages, you can expect to receive a bill instead of a refund check. And if you owe the government more than $1,000, you may also have to pay a penalty fee (which the IRS will happily calculate for you). This is especially true if this isn’t the first time you’ve come up short with Uncle Sam.

“If you owed money last year, and you owe money again this year, you’re going to get underpayment penalties,” said George Dimov, CPA at Dimov Tax Associates in New York City. “That applies to the IRS and to the states. In that case, if you don’t want a penalty, you should overpay.”

The amount the IRS will charge you varies on your individual circumstances, but according to Dimov it’s generally 2% to 3% of the amount you still owe the government — “the IRS has its own proprietary formula to estimate [the penalty],” he added.

In general, you won’t have to pay a penalty if:

  • The amount you owe the IRS is less than $1,000
  • You’ve paid 90% of your tax liability (the IRS lowered this threshold to 80% for the 2018 tax year only to take into consideration how changes to the tax law could confuse tax filers)
  • You paid 100% of your tax liability in the previous tax year

While the fact that you have $1,000 of leeway before incurring an underpayment penalty may tempt you to err on the side of claiming more allowances than you’re strictly entitled, keep in mind one allowance generally equals $4,200. The best way to avoid claiming too many allowances is to only claim those the IRS says you can, per the worksheets included with form W-4.

How Americans are spending their forced savings

Now that you know how to dial in the proper amount of allowances to claim and no longer give the federal government more money than it’s owed throughout the year, you can start putting your income to better use.

The average size of a tax refund so far for 2018 filings is $2,873. According to a National Retail Federation survey of tax filers, 49% of those expecting a refund this year plan on putting that refund money into some sort of savings account or product.

That’s great, except they’ve already lost out on a year’s worth of interest because of overpaying Uncle Sam with each paycheck. If they had claimed more allowances and placed the extra money from their paycheck into a common savings product, here’s how much they would have earned via interest.

 1-Year CDSavings AccountTax Refund
Interest Earned1.373%*0.272%*0
Money earned after a year$39.72$7.83$0

*APY for the 1-year CD and savings account are both based on national averages according to data from DepositAccounts.com as of April 2019; MagnifyMoney and DepositAccounts.com are both owned by LendingTree. Money earned after a year calculated assuming a deposit of $2,873 into either product.

Granted, the money earned from either a CD or a savings account won’t bump you into a higher tax bracket, but think of it this way — would you put your money in an account that offered zero interest? Because that’s what you’re doing when you don’t claim the proper amount of allowances on your W-4 and let the government hold on to your hard-earned cash for a year before paying it back in a big refund check.

The bottom line on your tax refund

Telling people they should feel bad about receiving a big tax refund ranks just above telling children Santa is a lie. And just like believing in Santa, getting a refund check for thousands of dollars might just give some people a warm, fuzzy feeling that justifies the cost.

However, the view through the cold, calculating eyes of a personal finance expert suggests that getting a large tax refund is a lost opportunity to invest money where it earns interest, such as a savings account or CD. You have to decide whether the excitement of that tax refund is worth the money you’re losing out on.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

James Ellis
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James Ellis is a writer at MagnifyMoney. You can email James here

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Can’t pay your taxes? There’s a taxpayer advocate who can help

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Not receiving a tax refund can be disappointing enough, especially if you look forward to getting a little financial boost each April.

What if you not only don’t get a refund, but you actually end up owing money? Even worse, what happens when you owe more money than you can afford to pay? Going to bat against the Internal Revenue Service by yourself can be annoying at best and downright traumatizing at worst. Luckily, you don’t always have to go through the process alone.

How a Taxpayer advocate can help resolve your tax problem

When you deal with the IRS, it’s possible that you’ll connect with an IRS representative who is helpful and can help you straighten out your tax problems. Other times, unfortunately, you may wait a long time to hear back from the agency, feel that they’re not addressing your concerns or unable to reach an agreement with the IRS on how much you owe.

The federal government has created a free, independent program called the Taxpayer Advocate Service to help. The Taxpayer Advocate Service is not for everyone who owes back taxes — it was created to help specifically when you are having problems dealing with the IRS.

Consider contacting the Taxpayer Advocate Service (TAS) if any of the following are true:

  • Your tax problem is causing you financial hardship.
  • The IRS is not responding in a timely manner.
  • You believe the IRS is not respecting your taxpayer rights. Your taxpayer rights include the right to be informed of IRS decisions about your account, the right to quality service (prompt, courteous and professional assistance), the right to pay no more than the correct amount of tax, rights to privacy and confidentiality, and other rights in the Taxpayer Bill of Rights.

How to get help from the TAS

Start by visiting the Taxpayer Advocate website, which includes answers to many questions and common tax problems. If you still need help resolving problems with the IRS, use the map feature on the website to find contact information for your local TAS office.
It’s not guaranteed that the TAS will accept your case. However, the TAS does have the power to help you when you’ve tried unsuccessfully to resolve your problem with the IRS by yourself. They can do the most good when your case falls into one of these categories:

It’s not guaranteed that the TAS will accept your case. However, the TAS does have the power to help you when you’ve tried unsuccessfully to resolve your problem with the IRS by yourself. They can do the most good when your case falls into one of these categories:

  • If your case needs to be processed quickly in order to avoid causing you more financial harm, the TAS can speed things up. For example, the IRS may need to remove a levy or release a lien when you are having a financial emergency, difficulty or hardship.
  • If your case is complex and different steps and units of the IRS are involved, the TAS can help coordinate the various parts of the process.
  • If you have a unique case that doesn’t work well with the “one size fits all” approach of the IRS, or you feel the IRS isn’t listening to you, the TAS can work on your behalf. They may try to have the IRS issue new guidance, if necessary, for your circumstances.

If the TAS determines that you qualify for help, you will be assigned your own advocate who will work on your case until it is resolved. You can talk to your caseworker by phone, or visit your local TAS office.

5 ways to resolve a tax debt on your own

Don’t panic over a bill from the IRS. You’re not the first person to get behind on taxes, and the IRS has specific procedures to help people like you get back on track. They don’t put people in jail for simply owing taxes; you’ll have to ignore a lot of notices or otherwise test the patience of the IRS before they levy your bank account or take other drastic action.

And not every tax problem means you need the help of a taxpayer advocate. You may be able to resolve your issues in one of these ways:

  1. Make sure you actually owe the tax. Read your tax return carefully from front to back. Look for errors, such as income counted twice, or missed deductions and credits. If you received a letter from the IRS stating that you owe a tax, make sure you understand what you owe and why. In some cases, you may just need to file an amended return, or send a letter of explanation to the IRS.
  2. Pay as much of the balance due as you can afford. Determine how much you can pay without jeopardizing your other expenses, including current taxes. The more you can pay now, the less you’ll pay in penalties and interest. You have several options for paying the IRS, including electronic funds transfer, a paper check or debit or credit card. (Be careful paying by card. It will cost you extra fees, and in some cases, the credit card interest rate is higher than you would pay to the IRS.)
  3. Pay off your tax bill within 120 days, if possible. You don’t need a formal payment plan if you only need up to 120 days to pay the full amount. The penalties and interest will continue to add up until your balance is paid.
  4. Ask for an installment plan if you need more than 120 days to pay. You can apply online for a formal payment plan. You’ll have to pay an application fee, plus penalties and interest until your debt is paid in full.
  5. Consider an Offer In Compromise (OIC). If you are way over your head in tax debt, you can request an Offer in Compromise so you can pay less than the total amount owed. You should only ask for an OIC as a last resort, and you will have to pay fees and fill out forms to apply. Use the IRS Offer in Compromise Pre-Qualifier to see if you are eligible to apply.

If you are in financial distress and can’t make any tax payments right now, the IRS may set your account as “Currently Not Collectible.” This doesn’t resolve your debt, and the interest and penalties continue to accrue. However, it does stop IRS collection activities as long as your account is in this status. You generally do not need a taxpayer advocate to have the IRS make this determination. To request this status, contact the IRS at 1-800-829-1040 or the phone number on correspondence you have received from the IRS. You may be required to complete a Collection Information Statement and submit documentation.

Avoid future problems with the Internal Revenue Service

If you’ve ever had more than the briefest encounters with the IRS, you’ll appreciate the importance of avoiding such encounters as much as possible in the future. Read these tips to see how you can avoid most future tax problems:

  • Learn about taxes. The tax code has changed significantly thanks to recent tax reform initiatives, and you need to know how the changes affect you.
  • Plan and organize your finances. You can only do so much about your taxes after the end of the year, when you’re scrambling to find receipts and paperwork and possibly getting hit by a big tax bill. Try to estimate your tax year ahead so you can do better tax planning and avoid surprises.
  • Prepare and review your tax return carefully. Making mistakes, such as not including all your income that is reported on 1099 forms, is the fastest way to get the attention of the IRS. If you prepare your own return, use tax software to improve accuracy. It’s also important to always file your return on time, even if you can’t pay the balance.
  • Adjust your income tax withholding or estimated tax payments. If you owed money when you filed your return, you may need to pay more throughout the year. Not only will you avoid a large one-time bill, but you may save interest and penalties as well.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Sally Herigstad
Sally Herigstad |

Sally Herigstad is a writer at MagnifyMoney. You can email Sally here