Preparing for tax season is stressful enough as it is, but imagine not having enough cash to pay your federal income tax. You can easily panic at this point, but keep calm and read on.
There are some options available for people who cannot come up with the money to pay their taxes without getting in trouble. But before all that, what happens if you end up paying or filing your taxes late?
If you either file your tax return late or if you do not pay your tax on time, you can expect to receive penalties from the IRS.
Keep in mind that the penalty for failing to file your tax return is assessed at a higher percentage rate compared to the penalty for paying your tax late. So, do your best to file your tax return even if you do not have the money to pay your tax yet.
The penalty for failing to file your tax return on time is usually 5% of the tax owed for each month or partial month that your return is late. It can go up to a maximum of 25%. In cases where your return is more than 60 days late, you can pay up to 100% of the tax you owe.
As for the penalty of failing to pay your tax on time– it is 0.5% of the tax owed for each month or partial month, up to a maximum of 25%, until you pay your tax in full. If your tax is not paid within 10 days of the IRS issuing a notice of intent to levy property, the rate can rise to 1%.
This notice allows the IRS to seize any state income tax refund that you should be getting. After that, they may even seize your wages or other income such as your bank accounts, business or personal assets, and Social Security benefits.
Interests on Top of Penalties
Aside from the penalties, you will also need to pay the interest on the amount of tax you owe until you pay your tax in full. The interest rate is equivalent to the federal short-term rate plus 3% that will be compounded daily. This interest rate is set quarterly.
Here are some of the options you have for paying your income tax:
Request an Installment Payment Plan
This option is available if you have filed your tax return on time. You may request approval to pay your tax in installments from the IRS. The interest in this type of setup will amount to 0.25% for every month in which the installment agreement is in effect.
If you have already filed your return, you may request this type of payment arrangement online, through phone, or through the mail. If you have not filed your tax return yet, you may attach your written request for a payment plan in front of your tax return files.
Take note that the IRS applies your payments to the tax owed first, then to any penalty, then to interest.
Use Your Credit Card to Pay Your Tax
Did you know that you can use your credit card to pay your tax? Using a major credit visa will help you cover your tax bill when you file. The IRS accepts Visa, Mastercard, American Express, or Discover for tax payment.
However, you need to pay your tax through one of these three services approved and recommended by the IRS:
Note that you will be charged a fee of 1.96% to 1.99% of the amount you’re paying, with a minimum fee of $2.69, $2.58, or $2.50, respectively.
In addition, your credit card company will charge you interest every month on any unpaid debt.
Offer in Compromise (OIC)
What does Offer in Compromise or OIC mean? This option is essentially a settlement agreement with the IRS that permits you to pay the most amount of money you can in a reasonable length of time possible.
However, this option is only available if you owe so much money that you’ll never be able to pay it back.
The IRS will evaluate your situation by considering your:
An OIC is a last resort option so expect that the IRS will not offer it to you without encouraging you to consider other payment options first.
Prepare for the tax season as early as you can and work with a professional or certified accountant if you find the preparation overwhelming. Keep in mind that it is better to file your tax return early than to receive a hefty penalty for filing it late.
If you do not have the funds to pay your taxes on time, keep in mind that you can either pay in installments or through your credit card. In the situation where the IRS confirms that you will not be able to pay your debt in full– ever, you may request for an OIC.