Regardless of whether you pay your tax bill in full or partially via an installment agreement, keep in mind that paying over time, even to Uncle Sam, will cost you more. The IRS charges a one-time fee of $105 unless you arrange to have your installment payments made via direct debit from your bank account.
The fee drops to $52 for direct-debit agreements. Some lower-income taxpayers could pay a reduced fee of $43, which was the previous user fee for all installment agreement applicants.
You'll be billed for any fee when the agency sends you a notice detailing your payment terms. Plus, penalties and interest continue to accrue to your unpaid tax bill. The IRS may also file a federal tax lien against you, which will be released when you pay off your installment loan.
If you want to apply for an installment arrangement, the IRS now accepts online applications.
Let's make a deal
What if you can't pay off your tax bill, in whole or part, in three years or five years or even longer? Then it might be time to negotiate.
If your income is as much as $100,000 and your tax debt is less than $50,000, you can request an offer in compromise, or OIC, from the IRS.
The IRS might be willing to accept your lump-sum payment offer of less than your total tax bill if it is realistic. In these cases, the agency hopes to get some taxpayer money sooner than it would after years of costly collection efforts.
The key here is that the amount must reasonably reflect your ability to pay. It's not merely haggling to get your tax bill reduced. In fact, the IRS is stepping up its efforts to weed out taxpayers who use the OIC route merely to delay paying their bills. Since Nov. 1, 2003, any taxpayer making a reduced payment offer has needed to include a $150 application fee with the request. The agency hopes this means that it will hear only from folks who truly need the negotiated bill. And the fee is waived for qualifying low-income taxpayers.
The IRS will review your financial situation and future income potential to determine whether your offer is appropriate. Be warned, however. Uncle Sam says this program was designed only for extreme cases, and few filers will qualify for the program under the terms the IRS would like. If you believe your situation does indeed meet the requirements, you need to file two forms: Form 656, Offer in Compromise, and Form 433-A, Collection Information Statement.
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You must also submit the $150 application fee along with Form 656-A, Income Certification for Offer in Compromise Application Fee and Payment. (The fee is waived for filers who have little or no income. They can claim a poverty exception when they file Form 656-A.) If you don't send this form along with your fee, the IRS will return your offer application "without further consideration."
If you submit everything as required, and the IRS determines you do not meet the qualifications and rejects your offer, you are out $150. But if the agency accepts your offer, your fee will go toward your new payment amount.
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Then the IRS wants even more upfront. With a periodic plan paid over 24 months, your offer must include your first payment. If you opt for a lump-sum OIC, in which you pay off your agreed upon lower tax bill in five or fewer payments over two years, you must include a 20 percent payment of the lower tax bill.
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The IRS also says it's willing to work with taxpayers who are having a hard time in this economy making their payments, tax or otherwise. The agency has created a special website with "what if" scenarios regarding tax and payment issues. The key is to call the IRS and let the agency know you need help meeting your tax obligations. If you just ignore your bill, the agency will continue to assess penalties and interest charges.
Regardless of which payment method you choose, make your decision now. Delay will only compound your financial and tax problems. And try to pay something. By sending in any amount when you file your return, at least you'll ultimately reduce your interest and penalty charges.