It’s a few days before the April 15th tax deadline and you’ve just finished preparing your return for last year’s taxes. Unfortunately, it turns out you owe additional taxes in an amount exceeding your ability to pay off the tax debt in full when your tax return is filed. You know you will be able to pay off the entirety of this tax debt, but you’ll need more time. What can you do? The answer will depend on several factors, such as how much you owe and how much time you need.
Short Term Agreement Request
If you need only a small amount of time, you can ask the IRS for a short term extension. The extension cannot exceed 120 days and the entire tax debt will need to be paid, subject to interest and applicable penalties. The biggest advantage of the short term agreement plan is that there is no user fee. You can request a short term agreement over the telephone or through the IRS’ website by applying for an Online Payment Agreement.
Set Up a Payment Plan
If more than a few months are needed to pay off the tax debt, a taxpayer can set up an installment plan where the taxpayer makes monthly payment to pay off the tax debt over time, up to a few years. However, the taxpayer must qualify before the IRS will agree to a payment plan.
Generally speaking, as long as the taxpayer owes less than $50,000, is up to date with all tax returns and can pay off the entire tax debt in a few years, the IRS will approve the payment plan. When requesting a payment plan, the taxpayer will get to choose the day of the month to make the monthly payment and the monthly payment amount. The monthly amount must be large enough to pay off the debt within a few years, but not too large that the taxpayer risks not making a payment.
Setting up a payment plan is not free. In addition to the interest and penalties the taxpayer will owe due to the delay in paying off the tax debt, there will be user fee. As of the time of this writing, the fee is either $52 for payments made via direct debit, $120 for non-direct debit payments or $43 for qualified low income taxpayers. Direct debit refers to giving permission to the IRS to automatically withdraw the monthly payment amount from the taxpayer’s checking account.
Taxpayers may set up a tax payment plan by either calling the IRS, submitting Form 9465 or using the using the Online Payment Agreement Application. If the payment plan request is being made when the current tax return has not yet been filed, it’s recommended the tax payer submit Form 9465 along with the return. If the return has already been filed when the payment plan request is being made, using the Online Payment Agreement Application is suggested.
Information needed to set up a payment plan will include the taxpayer’s:
- Social Security number
- E-mail address
- Mailing address from most recent processed tax return
- Filing status
- Date of birth
The IRS is fairly agreeable to giving taxpayers more time to pay off their tax debts. However, this extra time is not free, as penalties and interest will almost always accrue during the extension, on top of the fee for setting up a payment plan.