For many individuals, the amount owed to the IRS on their 2018 federal income tax returns has come as a total shock. Due to a variety of reasons – insufficient federal income tax withholding, failure to make estimated federal income tax payments, or the occurrence a significant tax liability with no accompanying income tax withholding, an individual may owe thousands of dollars when filing their 2018 federal income tax return that is due April 15, 2019.
This column gives some options for individuals unable to pay what they owe to the IRS at the time of filing.
One option that an individual should never consider is to not submit his or her 2018 income tax return. The individual should file his or her return before the April 15, 2019 deadline with whatever amount of the balance due that can be included with the return . If the balance due can be made within a few months of filing, the individual should pay the balance owed at that time. Even if the individual has to file for an extension, the individual should do so and pay as much as possible with the extension. The IRS will then mail the individual a notice of tax due. The cost for this option is the interest at the current federal rate plus a late payment penalty of 0.5 percent monthly (25 percent maximum). An individual could also pay by credit card. The cost of paying via credit credit is the percentage of tax as a convenience fee plus interest at the credit card rate.
Internal Revenue Code Section 6159(c) requires the IRS to accept proposed installment agreements from an individual who owes income tax of $10,000 or less. The $10,000 amount excludes penalties and interest. The individual guarantees that he or she will pay the tax liability in full within the next three years. The individual agrees that he or she has not entered into an installment agreement with the IRS within the preceding five years, has not failed to file an income tax return during any of the preceding five years, and agrees to file and pay all tax returns during the term of the agreement. Note that the $10,000 limit applies to tax only. Penalties or interest, assessed or accrued, does not count.
An individual’s specific tax situation will determine which payment options are available to him. Payment options include paying in full, requesting a short term agreement – paying in full in 120 days or less, or a long-term agreement – paying in full in more than 120 days.
An individual may apply online at www.irs.gov under the following conditions:
- Long-term agreement. The amount owed is $50,000 or less in combined tax, penalties and interest, and all required past federal income tax returns have been filed. Set up fee is $31.00 (waived for low income individuals) if paid through direct debit, or $149 ($43 for low income individuals) if direct debit is not used. Penalties and interest accrue until the balance is paid in full.
- Short-term agreement. The amount owed is less than $100,000 in combined tax, penalties and interest. There is no setup fee, but penalties and interest accrue until the balance is paid in full. Payments can be made via automatic payments from a checking account or check, money order or debit/credit card.
Individuals who cannot, or choose not, to use the IRS Online Payment Agreement can instead file Form 9465 (Installment Agreement Request) to request a monthly installment plan. If the amount owed is more than $50,000, then Form 433-F (Collection Information Statement) must be attached. The following table summarizes the Form 9465 user fees:
Interest and late payment penalties continue to apply during the installment payment period.
Extension of Time to File
An individual receives an automatic six-month extension for filing Form 1040 (until Oct. 15, 2019) by filing Form 4868 (Application for Automatic Extension of Time to File US Individual Income Tax Return). A reasonable estimate of one’s 2018 tax liability must be entered on Form 4868. The IRS can invalidate an extension if the tax estimate was not reasonable. An extension application is valid even if the estimated balance due is not paid with Form 4868.
Individuals can also receive an extension by paying part or all of their estimated tax due with a credit or debit card, or through the Electronic Federal Tax Payment System (EFTPS) at www.eftps.gov. If the EFTPS option is used,then Form 4868 is not filed.
An extension of time to file eliminates the late filing penalty if the return is filed by the extended due date. For 2018 returns, the extended due date is Oct. 15, 2019. If an individual paid at least 90 percent through payroll withholding, estimated tax payments or with Form 4868, then the late payment penalty does not apply during the automatic extension period. This is provided that the remaining balance is paid with the return. Interest is charged on any unpaid balance from the original due date.
Extension of Time to Pay
An individual can request a six-month extension to pay by filing Form 1127 (Application for Extension of Time for Payment of Tax Due to Undue Hardship). The individual must show that he or she cannot sell assets or borrow to pay the tax except under terms that would cause severe loss and undue hardship. Statements of assets, liabilities, and receipts and disbursements for three months preceding the due date of the tax are required. Form 1127 must be filed by the due date of Apr. 15, 2019. An approved extension eliminates the late payment penalty but has no effect on interest charges.