Settling with Uncle Sam: Ways to pay your taxes
If you haven't yet filed your federal tax return, you're not alone.
Millions of taxpayers wait for the April 15 filing deadline to settle their score with Uncle Sam, particularly those who owe a significant sum.
A few do so intentionally, opting to keep their savings in the market and earn interest as long as possible. But many more procrastinate because they don't have the money to pay what they owe.
Whatever the reason, Mark Luscombe, principal federal tax analyst for tax services firm CCH in Riverwoods, Ill., said it should be a top priority for all taxpayers—even those who can't pay their liability in full—to get their return filed and postmarked by midnight April 15.
"The failure-to-file penalty is worse than the late-payment penalty," he explained.
Indeed, the penalty for failure to file is 5 percent of your tax bill for each month, or part of a month that a tax return is late, not to exceed 25 percent of your unpaid taxes.
By comparison, the penalty for late payment is 0.5 percent (or one half of 1 percent) of your unpaid tax bill for each month, or part of a month after the due date.
You can pay your tax liability by check, money order, cashier's check or cash.
You can also make a free electronic funds transfer on IRS.gov or by phone at 800-555-4477.
If you can't pay off the full amount of your liability, Luscombe advises taxpayers to file their return and send in as much as they can to minimize the late-payment penalty.
You could also consider taking a loan to cover your balance in full or paying by credit card, since the interest payments you incur may be less than the combination of penalties and interest imposed by the IRS.
"If you're dealing with a temporary situation where the ship is coming in but it hasn't yet landed, then borrowing from another source, like a home equity loan, to pay the IRS can be cheaper, said Luscombe, noting some taxpayers who do have the savings to cover their bill still pay via credit card to accrue airline miles, then pay the balance off immediately.
If you decide to pay by debit or credit card, the IRS has a list of authorized payment processors on its website. The fees vary by service provider but range from $2.79 to $3.95 for a flat debit card fee and 1.87 percent to 2.35 percent for credit card fees.
It may also be prudent to borrow from your 401(k), depending on the rate of interest you would pay, said Bob Mecca, a certified financial planner in Hoffman Estates, Ill.
You can pay yourself back from payroll deductions without incurring a penalty, but remember that the money you borrow will not earn interest while it's out of your account, which affects the long-term value of your nest egg.
Mecca advises against making withdrawals from your tax-deferred IRA to meet their tax obligations.
"Use IRA money as a last resort," he said. "Money pulled from your IRA is taxed; plus, it incurs a 10 percent penalty if you're under age 50 1/2."
You can also try reasoning with the IRS. Contact the agency at 800-829-1040 to discuss payment options. This may include a short-term extension, installment agreement or an offer in compromise, in which the IRS agrees to settle your tax debt for less than the full amount, based on financial hardship.
A short-term extension to pay can be requested through the Online Payment Agreement application at www.irs.gov or by calling 800-829-1040. Taxpayers who request and are granted an additional 120 days to pay their tax in full generally will pay less in penalties and interest than if the debt were repaid through an installment agreement over a greater period of time.
Fees to set up an installment agreement range from $43 to $120.
Though interest still applies, the late-payment penalty is cut in half for any month an installment agreement is in effect. This reduced rate of 0.25 percent (one quarter of 1 percent) per month is only available if the tax return was filed on time.
"You nearly always want to contact the IRS and get a dialogue going," said Mecca. "Try to communicate heart to heart with the agent. Discuss extensions, installments and offers in compromise."
The only thing worse than owing taxes is paying your tax liability late.
Those who owe but can't pay in full should make every effort to file their return by midnight April 15 and explore payment options to minimize penalties and fees.