Last Updated Apr 11, 2011 9:09 AM EDT
But the reality for many folks who owe additional tax is that they cannot afford to pay in one lump sum and don't have access to other sources to get the cash. Here I'll cover the tax payment options the IRS offers for folks who really need to pay over time.
If you owe less than $25,000, you can complete and submit an Online Payment Application or OPA. Taxpayers or their representatives can apply and receive immediate notification of approval. Because there may be situations when you need to speak with the IRS before determining your eligibility for an installment agreement the OPA application also includes an address and a toll-free phone number to contact them.
When you submit an Online Payment Agreement Application, you need to choose from three payment options:
- Pay in full: this avoids additional fees, penalties, and interest.
- Short Term Extension: if approved, you will get an extension for up to 120 days to pay and will avoid any applicable payment fees.
- Monthly Payment Plan: if you cannot pay in full within 120 days, you may be approved to make monthly installment payments. There are strings attached: you must have filed all of your prior year's tax returns and pay a user fee of $105 ($52 if payments automatically deducted from a bank account). You'll also pay the IRS interest on the unpaid balance, which is currently an annual rate of 4%.
Since the IRS charges a user fee for setting up an installment agreement it may not be the best option for amount owed of $2,000 or less. There may be better ways to finance the tax you owe. Also keep in mind that you have up to five years to pay under the Installment Agreement and you'll have to pay all future taxes in full and on time.
You'll pay penalties and interest on the taxes you owe until the agreement is paid off. However, depending on your individual circumstances, the IRS could offer a payment plan at a reduced interest rate. Also, as a condition of the installment agreement, any future tax refunds will be automatically applied against the amount you owe until the balance is paid off.
Check back in later in a few days and I'll write about a special installment agreement for folks who owe more than $25,000 to the IRS.