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 4.5% of the tax that you owe per month, or part of a month, that your return is late up to 5 months. If your return is more than 60 days late, the minimum penalty for late filing is the smaller of $100 or 100% of the tax owed.
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.
You might be better off getting a bank loan or using a credit card, rather than asking for an installment agreement. You might save a significant amount on IRS interest and penalties by paying interest to someone else.
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 three months. Interest is compounded daily. Recently, the interest rate has been about 8%.
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 ½ of 1% of the tax that you owe per month, or part of a month, until the tax is paid in full or the 25% maximum penalty is applied. The ½ of 1% 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 ¼% for any month in which an installment agreement is in effect.
So, if the interest rate is 8% and the late-payment penalty is 3% (12 months X ¼%, assuming an installment agreement is in effect), then your interest rate ends up being about 11%. Keep in mind, however, that the interest rate fluctuates.
Your request for an installment agreement can’t be turned down if the tax you owe is $10,000 or less 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 more than $10,000 or the conditions above don’t apply to your situation, you might still qualify for an installment agreement. If you need an installment agreement, TaxCut will generate Form 9465 for you. Just go to the Installment Payment of Tax topic in the Miscellaneous section of the interview.