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What to Do When You Owe Taxes to the IRS

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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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
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How Soon Do You Get Your Tax Refund?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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One of the few silver linings of tax season is the potential to get a tax refund, which can be a much-welcomed infusion of cash that can be used to pay off debt, replenish savings or reach other financial goals. In a recent study of the tax period from 2013 to 2017, we found 77% of taxpayers in the largest 100 metros received a tax refund and the average refund was $3,016.

If you’re wondering how long it will take for your tax refund to hit your bank account, the answer is fairly straightforward.

  • If you e-file and choose to have your refund deposited directly, the majority of taxpayers receive their refunds within 21 days of submitting their returns to the IRS, according to the agency.
  • If you choose to file your taxes by mail, it can take six to eight weeks to receive your tax refund.

But the method you use to file your taxes isn’t the only factor that determines when that cash will hit your bank account. Read on to discover how you need to do your taxes this year to get your refund as quickly as possible.

How to get your tax refund quickly

The speed with which you’ll receive your tax refund largely depends on three choices you made when filing your taxes: how you file your returns, how you request to receive your refund and what credits you claim.

Choose e-file for the quickest tax refund

Although some 88% of taxpayers last year filed online, some Americans prefer filling out their tax returns on paper and sending them to the IRS via mail. Since the government can’t begin working on your refund until it receives your return, it’s in your best interest to make sure Uncle Sam gets the paperwork as soon as possible.

Depending on how you choose to receive your return (more on that below), filing your returns via mail will have you waiting six to eight weeks for your returns. You can cut that timeline in half by e-filing.

Filing your taxes electronically doesn’t necessitate purchasing a tax-preparation software. If your income is $66,000 or below, the IRS offers its own tax-prep software for free, and if you earn more, the government still offers electronic versions of all the forms you need. Simply fill them out yourself and file electronically (more info can be found in the IRS’s guide).

Check out our round-up of the Best Tax Software in 2019 here, which has a handy list of free options, as well as recommendations for small business owners and the self-employed.

Choose to receive your refund via direct deposit

If the IRS has to mail your refund check to you, it could take more than a month to reach you.

The IRS encourages filers to request their tax refund via direct deposit into a bank account in order to minimize the wait time.

If you e-file and choose direct deposit, you will likely get your refund within that 21-day window. However, it may take up to five additional days for your bank to deposit that money in your account(s).

You can give the IRS the account and routing number for up to three accounts when you file (or when prompted by tax preparation software), and the IRS will provide your refund to your bank.

Reasons your tax refund might be delayed

There were errors in your tax return

When it comes to filling out your returns, little mistakes can lead to major delays. Misspelling names, inputting the wrong social security number or choosing the wrong filing status are all examples of errors that can cause the IRS to delay processing your return, which in turn delays your refund. If this happens, you’ll likely get a call from the IRS asking for the correct information.

Of course one of the easiest places for an error to occur is with your math, particularly if you are filling out your returns without the aid of tax software or a tax professional. If you majored in comparative literature and don’t engage in any math more complicated than calculating the tip, you may want to double (and then triple) check your calculations.

Your direct deposit information was incorrect

To avoid any delays in processing your tax refund, you need to make sure the direct deposit account is either in your name, your spouse’s name or a joint account shared between you. Also be sure the account and routing numbers are correct, otherwise you’ll have to wait for the IRS to be alerted that an error exists and then mail you the refund by paper check—a delay that can take several weeks.

You claimed certain tax credits

If you haven’t received your refund in your bank account and wonder what’s the holdup, it could be because you claimed either the Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTC).

Because of the Protecting Americans from Tax Hikes (PATH) Act, the IRS can’t issue refunds to anyone who claimed either of these credits before the middle of February 2019. The earliest the agency expects anyone claiming these credits will see their refunds in their bank accounts is Feb. 27, 2019, meaning early filers this year may have to wait longer than usually to get their refund.

The Earned Income Tax Credit helps those earning low-to-moderate incomes with a tax credit. For the 2018 tax year, a single person without any qualifying children who earns $15,270 a year or less qualifies for the EITC. More info on qualifications can be found here.

The Additional Child Tax Credit is a credit claimed by taxpayers with qualifying children as their dependents. Typically, the child has to be under the age of 17 at the end of the tax year and live in your household. Under the Tax Cuts and Jobs Act, taxpayers can claim up to $2,000 for each qualifying child. More information about who qualifies can be found here.

Blame the government shutdown? Not so fast.

With the recent government shutdown, federal agencies like the IRS were hamstrung for more than a month, leading some to worry that the agency would be slower to process returns in 2019. In reality, the impact to tax refund processing should be minimal, the agency says.

The IRS announced at the end of the shutdown that it “will issue refunds as soon as possible and expects many early refunds to be paid in mid- to late February like previous years,” and so far there aren’t any reports of widespread delays. “We haven’t seen anything yet either way,” said James J. Burns, CFP and president of JJ Burns & Company based in Melville, N.Y. “Most people haven’t filed their returns yet.”

How to check the status of your tax refund

The IRS has helpfully provided an online tool, “Where’s My Refund?” that allows you to check your refund status. You can use this tool within 24 hours after IRS receives your electronically-filed returns (or four weeks after you mailed a paper return). Simply provide your social security number (or individual taxpayer identification number), filing status (single, married, etc.) and the exact refund amount, and the tool will give you one of three status updates:

  • Return Received
  • Refund Approved
  • Refund Sent

As soon as your refund clears the “Refund Approved” stage, the IRS should give you a date on when it will issue your refund.

Where should you save your tax refund?

To maximize your refund’s earning power, make sure you’ve got a savings account that earns a competitive interest rate. Here are a couple of great savings accounts available today.

Institution
APY
Minimum Account Balance to Earn APY
Synchrony Bank
High Yield Savings from Synchrony Bank

2.25%

$0

LEARN MORE Secured

on Synchrony Bank’s secure website

Member FDIC

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HSBC Direct
HSBC Direct Savings from HSBC Direct

2.25%

$0

LEARN MORE Secured

on HSBC Direct’s secure website

Member FDIC

Advertiser Disclosure.

We'll receive a referral fee if you click here. This does not impact our rankings or recommendations
Last tax season, Americans received an average refund of $2,899, according to the IRS, and while plenty of people plan on using the cash from a refund to help pay for vacations, trips to the spa, or even day-to-day expenses, a better course of action involves looking at how your refund money can help you achieve your long-term financial goals.

“It’s going to be different for everybody, depending on what their priorities are,” said Joy Liu, financial advisor at The Financial Gym in New York, NY. Liu advocates splitting the refund between paying down any high-interest debt you’re currently carrying and saving it in an online high-yield savings account you can tap in case of emergencies. “It’s going to return a higher yield than traditional banks can offer, so their money starts to make money,” she said.

Liu recommends saving three to six months’ worth of expenses in this account, which you can rely on when the furnace dies in the middle of a polar vortex and you need to pay for repairs or a replacement immediately.

If you feel you have enough money squirreled away to cover emergencies and don’t have any immediate pressing needs for cash, there’s always saving for the future. Putting the money into a Roth or traditional IRA can help you get a jump start on maximizing your contribution for the year, which is like giving the gift of not having to flip burgers to your future self.

The bottom line on your tax refund

If you want to make sure your tax refund gets to your bank account as quickly as possible, make sure to file return electronically and ask to receive your refund via direct deposit. You should receive your refund within 21 days after filing. Once you receive your refund, consider investing in your future by saving the money in a high-yield savings account offered by an online bank and congratulate yourself on surviving another tax season.

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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