The IRS is one creditor that has the power to almost ruin your life over what you owe. The difference between the IRS and other creditors is that the IRS doesn’t have to go through the courts to garnish your wages, attach your bank account, or put a lien on your property. Although they’re initially easier to ignore, the IRS is one creditor you probably don’t want to owe. You should take care of your tax bill early in the process so as to avoid having significant tax collection actions taken against you.
Make sure you file your tax return, even if you know you’re going to owe. It’s better to owe than not to file. While you can’t be arrested for not paying your taxes (though there are other significant consequences), you can be arrested for not filing (known as tax evasion). If you need more time to prepare your tax return, file for an extension.
Send a Late Payment
If you don’t have the money now, but you can expect to pay it within the next four months, send your payment late. The IRS will typically send two balance due notices about 45 days apart before they ask you to make a payment arrangement. In the meantime, send part of the tax debt that you owe. It will reduce your balance by the amount you send and reduce any penalty and interest you’ll have to pay. If you don’t think you’ll be able to pay the tax debt within 120 days, you can set up an installment agreement.
Request an Installment Agreement
You can request a formal installment agreement with the IRS by filing Form 9465. You can send it with your tax return or separately. Tax filing software like TurboTax can help you fill out the form. The IRS will typically accept arrangements for a balance that’s less than $25,000. To set up the arrangement, you’ll have to pay a user fee and late fees. If your balance is more than $25,000, you’ll have to provide documentation of your finances so the IRS can figure out your monthly payment amount before accepting the installment agreement request.
Pay by Credit Card
Putting your taxes on your credit card is an option, if you have enough available credit. Credit card interest rates are almost always higher than IRS interest rates, but an installment agreement may not be an option if you’ve created one in the last five years. The IRS doesn’t accept credit card payments directly, but uses third-party service providers that charge their own convenience fee that’s a percentage of the tax you charge. Note that it may be harder to get this credit card balance settled or discharged in bankruptcy if you ever face that decision.
These options may become less available as your tax debt becomes more delinquent. If you are simply unable to pay your tax and the IRS believes it could never collect the tax from you, they may agree to a tax settlement in the form of an Offer in Compromise. You typically need to be facing extreme hardship before the IRS agrees to a settlement payment. If you haven’t reached that point, try one of the previously mentioned options first.