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Payment Options for Those Who Owe the IRS

As that April 15 tax deadline approached every year, many people get caught up in tax refund fever, and spend most of their time worrying how they're going to spend that refund check. Many other people, however, wish they had such worries. Millions of people end up owing the IRS money every year, and hundreds of thousands of those people owe more than they can afford to pay in one go. If this sounds like you, don't worry. There are a number of payment options available to you to make your tax bill more manageable, and it doesn't have to involve exorbitant fees or become a credit nightmare.

The first trick of the trade is to always get your return in on time, whether or not you can actually pay the bill. If you don't file for whatever reasons, including not having the money to pay your bill, then the IRS charges you a failure to file interest rate of 5% on you the money you owe, and that interest will continue racking up until it hits 25%. If you file but don't pay, you will only be charged .05% interest. The IRS does offer tax-filing extensions, but they are only filing extension. When you request the extension, you must still estimate your tax liability and send in a check for that amount. If you must file for an extension and can't pay your entire tax bill, then try to at least send in a portion of it. You won't be off the hook interest wise, but you will mitigate your damages by lowering the total outstanding amount.

Once your return is prepared and you know what exactly you owe Uncle Sam, there are a few ways you can try to pay. First, check out your credit cards. Can you borrow money off your cards to pay your tax bill? Compare your credit card interest rate and the IRS interest rates and penalties and see who it is cheaper to get into debt with. If you think your financial trouble is going to clear soon and that you will be able to pay off your credit card loan quickly, then plastic may be your best bet.

If credit cards are not an option, then investigate the installment payment plans available through the IRS. If you've always filed and paid on time in the past and your tax bill is less than $10,000, then the IRS is legally obliged to allow you to pay by installment. If your tax bill is larger, or if this isn't the first time you haven't been able to pay your bill, qualifying for an installment plan may be a little trickier. At the end of the day, however, the IRS wants to get their money, and if letting you pay by installment means they'll be able to collect, then they're going to make a deal. You must be able to pay off the entire bill within three years, and the IRS can terminate the agreement at any time.

The last option is to arrange an offer in compromise (OIC) with the IRS. An OIC is like a credit card settlement; you agree to make a lump sum payment that is less than your total bill, and the IRS writes the bill off as paid. This is the IRS's least favorite plan, and if you go this route, be prepared for plenty of paperwork, pleading, and a $150 fee.

Not being able to pay your tax bill is not the end of the world. Meet the burden head on and choose a payment option that will clear your bill and save you a lot of sleepless nights.