How to Handle Owing the IRS

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If you find that you have a balance due on your 2013 tax return, there are four different ways of paying off your tax bill.

To figure out a payment strategy for your 2013 taxes, analyze your personal budget to find out how much can you pay the IRS by April 15th, 2014. Will you need extra time beyond April 15th to pay your taxes? If so, how much time will you need? Based on how much and when you can

pay, you can figure out which payment strategy will work best for your needs.

1. If you can pay your 2013 taxes by April 15, 2014, then consider the following procedure. Set aside your tax payments in savings between now and April. Then in April file an extension using Form 4868, and send along a check for the amount you owe. Once the check clears, file your tax return. Be sure that your extension payment is reflected on your tax return (line 68 of Form 1040). If you can afford to pay sooner, you can send in your extension payment even before April if you want.

2. If you can pay some of your 2013 taxes by April 15th and can pay the remainder of your taxes by October 15, 2014, then send in payment for what you can by April 15th using Form 4868, and continue making payments after April 15th by using Form 1040-V (pdf). File your return by October 15th. The IRS will add interest and late payment penalties to the amount paid after April 15th, but you’ll avoid the late filing penalty as long as

you requested an extension.

3. If you can pay all of your 2013 taxes by February 12, 2015, then send in payment for what you can by April 15th using Form 4868, and continue making payments after April 15th by using Form 1040-V (pdf). File your return by October 15th. Once your tax return is filed, call the IRS at 1-800-829-1040 and request additional time to pay in full. The IRS will grant a person up to 120 days to pay in full. I came up with the February 12, 2015, date by adding 120 days to October 15th. The 120-day-to-pay-in-full method avoids the user fee associated with setting up an installment agreement. The IRS will add interest and late payment penalties to the amount paid after April 15th, but you’ll avoid the late filing penalty as long as you requested an extension and file by October 15th.

4. If you’ll need a longer period of time to pay (that is, longer than February 12, 2015), then go ahead a file your tax return, and request an installment agreement. This is very easy to set up with the IRS. Use Form 9465 to request an installment agreement. This form can even be sent in with your tax return, or you can set up the installment agreement on the IRS Web site through the Online Payment Agreement Application. An installment agreement is a contract in which you agree to pay the IRS over time. You’ll indicate how much you are paying each month, what you want your payment due date to be, and whether you want this amount deducted from your bank account automatically. The IRS does charge a user fee to set this up. The IRS will add interest and late payment penalties to the amounts paid after April 15th, but you’ll avoid the late filing penalty as long as you either filed by April 15th or requested an extension and file by October 15th.

Be aware that the IRS will add interest (around 3% per year) and late payment penalties (around 0.5% per month) for any payments that are “late” — that is, after April 15th.

Combined, the IRS’s interest and penalties work out to approximately 9% annually (that’s 0.5% per month x 12 + 3% interest). It may be possible to take out a bank loan or credit card advance to pay off the IRS. But only do this if your the interest on that loan will be less than 9%.

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