According to Uncle Sam’s tax records, you’re in the red. It’s time to pay the proverbial piper, but you aren’t quite sure how. No need to worry, there are a variety options for paying off your tax bill.
Credit card
In today’s society, you can use credit cards to pay for just about anything – fast food, gas, groceries – even your taxes. The Internal Revenue Service (IRS) has contracts set up with two companies -- Official Payments Corporation and Link2Gov -- that will file your taxes via a credit card payment. You can file with either company electronically or through the mail, using the phone or the Internet. Keep in mind, this service does come at a cost, with each company charging a fee for their assistance. Moreover, remember that paying off your credit card on time and in full is key to this payment option. If you do not, you could rack up considerable interest charges.
Installment agreement
You can also establish a payment plan with the IRS to pay a large tax bill. To set up this sort of program, simply fill out Form 9465, Installment Agreement Request. In setting up this arrangement, you can pick your monthly payment amount and even its due date; however, you must agree to pay off your debt within a three-year time period. There is a fee for this service. In addition, the IRS may refuse your request for this sort of pay plan, so access to this option is not necessarily guaranteed. Moreover, even if you are granted this sort of arrangement, you will still have to pay all penalties and interest on your unpaid tax bill.
Partial payment installment agreement
For those taxpayers who owe larger amounts in taxes and have no means of paying them off, the IRS offers a long-term payment plan at a reduced amount. Under this arrangement, the taxpayer still makes monthly payments, however, they are not required to pay off their total tax debt. That is, after the agreed upon amount is paid, the remaining taxes will be forfeited by the government. Individuals who request this payment plan must provide the IRS with detailed, verifiable financial information and may be required to address any equity in assets that could be utilized to pay the amount owed. Not everyone is eligible for access to this type of agreement. In addition, the IRS will review the arrangement every two years to keep tabs on any changes to the taxpayer’s financial circumstances. If things improve, expect the agreement’s terms to change or be terminated.
Compromise
The last option for taxpayers unable to pay the money owed to the government is called an offer in compromise, or OIC. Depending on your situation, the IRS may accept an OIC in lieu of your owed taxes. Under this agreement, you are required to make a lump sum payment at a reduced amount. Don’t try to outsmart the government however – they are on to any sort of tricks. The IRS will carefully assess your financial situation to determine if your offer is a fair one. This sort of arrangement is used only in rare cases, with most filers not qualifying for an OIC. To learn more, consult your accountant.
Additional tips for your taxes…
Work with an accountant
If you filed your taxes yourself, you may want hire an accountant to double check your work. As professionals trained in this area, accountants are aware of tax laws that most people are not aware of, which could save you a bundle on your taxes.
Make changes for next year
This year may be a wash, but its never too early to start thinking about things you can do to lower your tax bill in 2007. Things to consider include: keeping receipts for any charitable donations, opening a non-taxable 401(k) or health savings account at work, investing in an IRA rather than short-term investments, and buying a home, where interest paid is tax deductible.
Still file on time
Even if you know you can’t pay your taxes, filing on time is still a good idea. In doing so, you will avoid paying the IRS’s failure-to-file penalty of 5 percent per month (up to a maximum of 25 percent) of your balance due. You will still accrue a monthly failure-to-pay penalty on your outstanding bill, but it’s only 0.5 percent of the amount owed.
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