With tax day just around the corner, some Americans may feel financially unable to pay back their tax bill by this year’s April 18 deadline.
Fortunately, the Internal Revenue Service offers some repayment options to help you manage your owed debt.
“It is a common situation for taxpayers to run into, not having enough money to pay taxes that are due when they file a tax return,” Eric Bronnenkant, a CPA, certified financial planner, and head of tax at Betterment, told Yahoo Finance. “But there are multiple options that can help you repay that debt.”
Here’s what you should know.
One way to pay off your tax debt is by applying for a short-term repayment plan.
“This option is available for taxpayers who owe less than $100,000 dollars [in combined tax, penalties and interest],” Bronnenkant said. “There is no formal application [set up fee] and accrued penalties and interest apply until the balance is paid in full.”
Short-term repayment plans offer a repayment period of a maximum of 180 days. You can apply online, or call the IRS at 800-829-1040 and file a formal application through a Form 9465 to set up the installment agreement.
You can pay the owed amount directly from your checking or savings account through Direct Pay or by check, money order or debit/credit card. But there are fees when paying by card.
If you can’t pay off your owed balance in less than 180 days, you can also apply for a long-term repayment plan, Bronnenkant said. To qualify, taxpayers must have filed all required returns and owe $50,000 or less in combined tax, penalties, and interest.
This repayment plan requires a setup fee of $31 if you choose to pay through monthly automatic withdrawals or $130 if you opt for a non-direct debit repayment. According to the IRS, automatic payments are also required if your owed balance is more than $25,000 for individuals and $10,000 for businesses.
“Application fees typically apply but can be reduced for low-income taxpayers,” Bronnenkant said, adding that long-term repayment can have a maximum term of 72 months.
Just like the short-term repayment plan, you can also apply directly through the IRS website, or contact an IRS representative and apply through a Form 9465.
If you can’t pay your tax obligations in time or paying the debt could create a financial hardship, you may request an Offer in Compromise. This is an agreement between the IRS and the taxpayer to settle the tax liability for less than the owed amount.
According to the National Taxpayer Advocate, a compromise can be a time-consuming process. But if the IRS doesn’t reject, return, or withdraw your offer within two years of the postmarked date received, the offer will be accepted.
“The IRS could potentially accept a settlement for a payment for less than the amount owed, but this option is intentionally not easy to qualify for and anyone considering it should go through the pre-qualifier tool,” Bronnenkant said. “Factors that are considered are the ability to pay, income, expenses, and asset equity.”
As Bronnenkant mentioned, the IRS may agree to accept your offer if there is a “doubt as to collectibility,’” meaning that you don’t have enough income or assets to pay off the balance in full. Another reason is if the IRS determines that paying off the debt would create severe economic hardship or would be unfair to the taxpayer.
Last, the IRS may accept a payment of less than the full amount if there is a “doubt as to liability,” meaning you believe the debt amount is incorrect.
If you’re considering applying for a compromise, make sure to have all your documentation ready, Bronnenkant warned, to help you track any payments you’ve made or explain why you can’t pay the debt in full.
“The IRS is working harder at improving the taxpayer experience right now,” he said. “They want to keep things moving along and help folks address their unique challenges.”
Gabriella is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.
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