There are times when you can’t immediately pay the IRS what you owe them. It isn’t a nice situation to be in, but there are ways to work through it. However, not filing a tax return isn’t one of them. It simply makes things worse.
If you owe tax and you don’t file your tax return on time, the total late-filing penalty is usually 5% of the tax that you owe per month, or part of a month, that your return is late up to a maximum of 25% of the tax owed. If your return is more than 60 days late, the minimum penalty for late filing is the smaller of $135 or 100% of the upaid tax.
To avoid this penalty, make sure that you file your return on time even if you can’t pay. You can request an installment agreement by filing Form 9465 with your return. If the IRS approves your request, they’ll set up a monthly payment plan to pay off what you owe.
Generally, interest is charged on any unpaid tax from the due date of the return until the date of payment. The interest rate is the federal short-term rate plus 3%, and it’s determined every 3 months. Interest is compounded daily. Recently, the interest rate has been about 6%. Interest is also charged on the penalties for late filing. If you file on time but you don’t pay the total amount due, you’ll generally have to pay a late-payment penalty of .05% of the tax that you owe per month, or part of a month, until the tax is paid in full up to a maximum penalty of 25% of the tax due. The .05% rate increases to 1% if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy. If you file by the return due date, the rate decreases to .25% for any month in which an installment agreement is in effect. Keep in mind, however, that the interest rate fluctuates.
You can request an installment agreement by completing an online payment agreement or by filing Form 9465, Installment Agreement Request, with your return. An online application may only be filed if you owe $25,000 or less in combined taxes, penalties and interest. If the IRS approves your request, they’ll set up a monthly payment plan to pay off what you owe.
Fees for entering into an Installment Agreement:
Online payment agreement or payroll deduction: $105
Direct debit: $52
Lower- income individuals may qualify for a reduced fee of $43 by filing Form 13844,: Application for Reduced User Fee For Installment Agreements.
Your request for an installment agreement can’t be turned down if the tax you owe is less than $10,000 and all of the following conditions apply:
During the past 5 tax years, you (and your spouse if filing a joint return) have filed all of your income tax returns on time and paid any income tax due, and you haven’t entered into an installment agreement for payment of income tax.
The IRS determines that you can’t pay the tax owed in full when it’s due and you give the IRS any information needed to make that determination.
You agree to pay the full amount you owe within 3 years and to comply with the tax laws while the agreement is in effect.
Even if you owe $10,000 or more, or the conditions above don’t apply to your situation, you might still qualify for an installment agreement.
If you need an installment agreement, the H&R Block software will generate Form 9465 for you. Just go to the Installment Payment of Tax topic in the Miscellaneous section of the interview.
Important: You may be better off using another payment method, such as getting a bank loan or using the available credit on a credit card. You should determine which payment method results in the lowest overall cost.