Times are hard for so many people right now, whether you have lost your job, had to borrow from your retirement account or have forgiveness of debt. There are many reasons that could trigger a higher than expected tax bill this year. If you are one of those individuals who owe a substantial amount of taxes to the Internal Revenue Service ("IRS") there are some options available to you.
The IRS allows for an installment agreement. This is accomplished by completing Form 9465 when the balance is $25,000 or less in combined tax, penalty and interest. There is an agreement fee of $105 whenever you enter into this type of installment plan. With this Form you must specify the amount you are going to pay monthly and on what day you wish to make that payment (1st-28th).
Before you consider entering into an installment agreement with the IRS, you should attempt to pay the amount owed through other means. If you can, borrow from a home equity loan. Many times the interest rate charged by a bank are lower than the combination of penalties and interest you may end up paying to the IRS.
If you decide to enter into an installment agreement, you should base your monthly payment on your ability to pay that amount. This installment agreement allows you to make a series of payments over time. The IRS offers various options such as:
• Direct Debit from your bank account
• Payroll deductions from your employer
• Payment by check or money order
• Electronic Federal Tax Payment System (EFTPS)
• Payment by credit card via the phone or internet
• Online Payment Agreement (OPA)
So, when you are filing your tax return and do not have the balance owed you can request a pre-assessment installment agreement by using either the Online Payment Agreement (OPA) application on the IRS website or you can submit Form 9465 and attach to the front of your return.
If you decide to do the payroll deduction agreement you will submit Form 2159. This form must be completed by your employer.
ACTION ITEM: If you owe income taxes and don't have the money to pay, consider entering into an installment agreement.
Thomas F. Scanlon, CPA, CFP®