April 16, 2024

How to Work With the IRS to Pay Your Tax Bill

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Updated for tax years 2023 and 2024.

It’s no secret that tax refunds get the spotlight each tax season. But many Americans end up owing the Internal Revenue Service (IRS) money after they file, and this tax season is no different. Fortunately, the IRS provides convenient ways to pay your tax bill even if you don’t have the cash on hand when it’s due. The agency offers a variety of payment plans to help you tackle that debt. Let’s take a look at your options.

What happens when you don’t pay your tax bill on time?

If you fail to pay and file your tax return by the deadline, you may owe two penalties.

Failure-to-file penalty: Generally, you will owe 5% of the unpaid taxes for each month you are late filing. The penalty maxes out at 25% of your unpaid taxes.
You could apply for a tax extension, which gives you six more months to submit your return. However, this method does not give you more time to pay any taxes you owe.
Failure-to-pay penalty: You will owe 0.5% of your unpaid taxes for each month or part of the month you fail to pay (think of it as an interest payment). This can also build up to 25% of your unpaid taxes.

One thing many individual taxpayers don’t realize is you can file your taxes even if you can’t pay your tax bill. The IRS recommends that you file your taxes on time to avoid the failure-to-file penalty and then pay as much of your tax bill as possible before the April due date. Next, you should be proactive about setting up a payment plan for the remainder of your debt to Uncle Sam.

IRS tax payment plan options

The IRS offers online payment agreements for those who cannot afford to pay their entire tax bill upfront. This will allow you to schedule payments over a certain period, depending on your chosen plan. Your payment amount and payment date will depend on the length of your payment plan and how much tax you owe.

Here are your options when it comes to paying your tax bill:

Pay Now: The IRS makes paying your tax bill immediately simple and free for those who can do so. Head over to irs.gov/payments to start. You can pay with IRS Direct Pay, which takes the money directly from your bank account. You can also use the Electronic Federal Tax Payment System (EFTPS) via the internet or phone.

Short-term payment plan: If you owe less than $100,000 and can pay your tax bill in 180 days or less, this payment option is for you. You can apply online, in-person, by mail, or by phone and set up automatic payments from your checking account for no additional fee. You must also pay any accrued penalties and interest until your balance is fully paid. Other payment options include a check, money order, or debit/credit card, but processing fees apply when paying with a card.

Long-term payment plan (installment agreement): If it will take you more than 180 days to pay your tax bill plus any penalties and you owe $50,000 or less, a long-term payment plan may work for you. You have two options when making an installment agreement request:

Direct debit: You pay a $31 set-up fee and agree to automatic withdrawals for your outstanding balance plus penalties and interest until paid in full. If you qualify as low-income, the setup fee is waived.
Non-direct debit: You make non-automated monthly payments by Direct Pay, check, money order, or debit card/credit card. This option has a $130 setup fee ($43 if you qualify as low-income). Card payments will also result in a fee.

Offer in Compromise (OIC): An OIC lets you settle your tax debt by paying less than the total amount due. This option is only available to those who can’t pay their bill in full or for whom paying their tax debt will create a significant financial hardship. You can check with the IRS online tool to see if you pre-qualify for an OIC and discuss your specific situation to determine if you can work out a deal.

Don’t rely on credit cards to pay your tax bill.

It’s usually best to avoid paying your tax bill with a credit card if you can’t immediately pay it off. As of early April 2024, the average credit card annual percentage rate (APR) is 27.89%. Financing that debt at a high interest rate means you pay a lot more in the form of interest, and it will likely take you longer to be debt-free. Instead of using a credit card, consider applying for an online payment agreement with the IRS. While you will still owe applicable penalties and interest, the interest rates are typically much lower and should save you more money than your average credit card in the long run.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

The post How to Work With the IRS to Pay Your Tax Bill appeared first on TaxAct Blog.

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IRS Payment Plans: The Basics

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If you find that you owe a significant amount of money to the government when filing your income tax return, you may not be able to pay the full amount right away. The Internal Revenue Service (IRS) knows that not every taxpayer has the ability to pay large tax bills upfront — that’s where IRS payment plans come in. In this article, we’ve broken down everything you need to know about IRS payment plans for tax debt so you can decide if it’s the best option for your financial situation.

At a glance:

Enrolling in an IRS payment plan can help you avoid any IRS levy action or a notice of federal tax lien.
Short-term and long-term payment plan options are available.
Many payment plans require a set-up fee, and penalties and interest will continue to accrue until the balance is paid in full.

What are IRS payment plans?

IRS payment plans allow you to pay your tax bill in installments. You can choose a short-term or long-term payment plan and pay using various methods. Keep in mind that the IRS will charge you penalties, interest, and fees for setting up your plan. Interest rates can vary — see the IRS Interest page for additional information.

What do I need to apply for a payment plan?

The easiest method is to apply for an online payment agreement on the IRS website. When applying, you will need to provide certain information, including your name, email address, home address, birth date, filing status, and Social Security number or ITIN. You may also need to provide the balance due based on the agreement you request.

To make the process easier, TaxAct® can help you set up an IRS payment plan when you e-file using our tax preparation software.

How do I make payments?

If you fall into either of the following categories, you will need to pay through Direct Debit, where the IRS takes automatic monthly payments from your bank account:

You’re an individual taxpayer with a balance over $25,000
You’re a business owner with a balance over $10,000

If your balance is below the above amount, you have the following options for both short-term payment plans and long-term plans called installment agreements:

Pay directly from a checking account or savings account through Direct Pay.
Pay electronically online or by phone using the Electronic Federal Tax Payment System (EFTPS), which requires enrollment.
Pay by check, money order, or debit/credit card (note that fees will apply if you choose to pay by card).

What are the payment plan fees?

Different fees apply based on the type of plan you choose:

Short-term payment plans: Short plans of 180 days or less have a $0 set-up fee, but penalties and interest will continue to accrue until the balance is paid in full.
Long-term Direct Debit Installment Agreement: Online application fees differ based on how you apply. If you are making Direct Debit payments with an installment plan, the fee is $31 when applying online or $107 when applying by phone, mail, or in person. If you qualify as a low-income taxpayer, your set-up fees can be waived if you apply online, by phone, or in person. You will also need to pay any accrued penalties and interest until the balance is paid in full.
Long-term payment plan (not Direct Debit): Online application fees differ based on how you apply. The fee is $130 when applying online or $225 when applying by phone, mail, or in person. If you qualify as low-income, your set-up fees can be lowered to $43 if you apply online, by phone, or in person, and you may be able to get the fee reimbursed if you meet certain conditions. You will also need to pay any accrued penalties and interest until the balance is paid in full.

Whenever you want to change an existing payment plan, such as updating your payment amount, due date, or payment method, you will pay a $10 fee online or an $89 fee if you revise it by phone, mail, or in person. If you qualify for low-income status, the fees are $10 and $43, respectively, but these could be reimbursed if you qualify.

How do I check my balance?

When you set up your payment plan, you’ll create an online account with IRS.gov. From there, you can log in via the View Your Account Information page to see your balance. It may take one to three weeks for a recent payment to be credited to your account. If you owe taxes for more than one year, you will see your balances broken down by year.

Paying your taxes with TaxAct

If you’re ready to file your taxes, TaxAct is here for you. Our tax software will walk you through the filing process, and we can help you easily request an IRS payment plan if it’s right for your tax situation.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

The post IRS Payment Plans: The Basics appeared first on TaxAct Blog.

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Got a Big Tax Bill? Don’t Avoid Filing

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Updated for tax years 2023 and 2024.

Avoiding problems rarely leads to a satisfying resolution, and ignoring a large tax bill is no different. In reality, the more a taxpayer ignores their tax bill, the bigger it can get. But owing a lot in taxes shouldn’t stop you from filing — it’s usually better to tackle the issue head-on. If you owe a lot in federal or state income taxes this year or suspect you do, here are some tips to remember.

1. You can avoid penalties for late filing, even if you can’t pay the total tax due.

Not filing your federal tax return at all can be tempting if you can’t pay the amount of tax due. After all, the Internal Revenue Service (IRS) doesn’t immediately miss your tax return. And who wants to complete their return if they even suspect the results will be bad news? By completing your return, you’ll find out exactly what your tax liability is, and you can begin making plans to deal with it.

You may not be able to avoid a tax bill, but you can minimize the damage by filing your return on time. The IRS imposes a failure-to-file penalty if you don’t file your tax return by the filing deadline. This fine is separate from any interest and failure-to-pay penalties you may owe on late payments.

If you don’t have the information to complete your tax return by the due date, you can file for a six-month tax extension, but note that this won’t give you more time to pay your tax bill. However, you should still finish your return as soon as possible — it won’t be any easier five and a half months from now.

2. The sooner you pay the tax due, the less you’ll pay in interest and penalties.

Taxes and interest are imposed on your tax bill starting from when you should have paid them. That may be when your tax return is due — typically April 15. And if you owe more than $1,000, you may already owe interest and late payment penalties for not making sufficient quarterly tax payments.

You can’t go back in time, but the fastest way to stop accruing interest and penalties on past-due taxes is to pay them off as soon as possible.

It may be tempting, but be cautious about using your credit cards or taking on other debt to pay your tax debt. By the time you pay transaction fees and higher interest rates, you may have been better off paying the IRS directly, even if you can’t pay it all at once — their interest rates are typically much lower than what a credit card company offers.

3. The IRS offers payment options.

If you have unpaid taxes and can’t pay your tax bill all at once, the IRS offers payment plan options:

Short-term payment plans: If you can pay your tax bill within 180 days, you can ask for a short-term payment plan. You’ll still pay penalties and interest until the balance is paid, but there are no fees for setting up a short-term plan.
Long-term payment plans: If you don’t think you can pay off your big tax bill within the next 180 days, consider asking for a long-term payment plan called an installment agreement. You can apply online, by phone, by mail, or in person. Setup fees will apply, and you will continue to accrue penalties and interest until the total bill is paid, just like a short-term plan. You will pay lower setup fees if you agree to automatic monthly payment withdrawals, apply online, or qualify as low-income.

4. You may qualify for an abatement of penalties.

If you cannot file your tax return or pay because of some extenuating circumstances, such as a serious medical crisis, you can write to the IRS and request penalty relief. You should specifically ask for an abatement of penalties. The IRS does not offer interest relief.

5. If you really can’t pay, seek help.

Sometimes, people get into deep tax trouble that they can’t work their way out of. If you owe more in taxes than you have in net assets, for example, you may need to consider filing an Offer in Compromise (OIC) with the IRS.

An OIC allows you to settle your tax debt with the IRS. The IRS compares your net assets (assets minus liabilities) to the amount you owe and may forgive part or all of your tax bill. They also consider your ability to pay based on your income and expenses. An OIC is not to be taken lightly — it requires considerable paperwork and is not always accepted. However, it may be the best option in a seemingly impossible tax situation.

TaxAct® can help.

If you’ve been putting off filing your taxes, let TaxAct help. Whether you’re expecting a tax refund or a tax bill, our tax preparation software is here to guide you through the filing process. We’ll ask you some questions to determine potential ways to save with tax deductions or credits, and we can even help you set up an IRS payment plan if needed.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

The post Got a Big Tax Bill? Don’t Avoid Filing appeared first on TaxAct Blog.

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Cows, Farming, and Taxes: What You Need to Know

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Updated for tax year 2023.

If you’re planning to start a farm or already running one, you should know that tax laws for farms can be more complicated than you might think. Even seemingly simple write-offs like livestock can operate differently on your federal income tax return. But don’t worry — we have all the details about what qualifies as a farm and where and how to deduct your farm expenses.

Does my business qualify as a farm?

Have you converted your backyard into a vegetable garden? Do you keep several beehives? How about the chickens, fruit trees, and other cool stuff you’ve included on your property? Well, the IRS judges farm vs. victory garden questions similarly to how it identifies a hobby from a small business. Tax qualifications are determined on a case-by-case basis. To be considered a true farmer versus merely someone with a green thumb, there are specific requirements you’ll need to meet.

According to the Internal Revenue Service (IRS), you’re in the business of farming if you “cultivate, operate, or manage a farm for profit, either as owner or tenant.” Your farming activities can include livestock, dairy, poultry, fish, fruit, or vegetables and operate as a plantation, ranch, range, orchard, or grove.

Here are a few questions the IRS may use to determine if your business qualifies as a farm:

Do you operate your farm in a businesslike manner and keep detailed business records?
Do you depend on farm income for your livelihood?
Does the time and effort you spend on your farm business indicate you intend to make it profitable?
Do you change methods of operation to improve profitability?

You may not need to answer yes to all, but you must build a detailed case for Uncle Sam, so keeping records of your business and profits is crucial.

Tax Tip: If you and your spouse both materially participate as the only members of a jointly owned and operated farm, you can file as a qualified joint venture.

What kind of farm records do I need to keep?

There is no right or wrong way to keep tax information records for your farming business, as long as you include your business transactions, gross income, and any farm expenses, deductions, and tax credits you plan to report. However, if you’re not sure where to start, the IRS recommends you keep the following kinds of records for farming operations:

Business expenses for travel, transportation, entertainment, and gifts
Employment taxes and payroll records
Excise taxes (you can claim a credit or refund of excise taxes on certain fuels)
Asset records for farm machinery, farm equipment, and real estate you purchased
Farm inventory
Bank and credit card statements for proof of payments
Tax returns

What tax credits are available to farmers?

The kind of tax credits you can claim as a farmer or rancher depends on the nature of your farming business and the state you live in. Many states offer their own tax credits to help farmers, so be sure to check your state’s specific laws and resources.

The following are examples of some federal tax benefits that may apply to your farming business depending on your situation:

Fuel Excise Tax Credit: This credit is generally not available to individual taxpayers; it’s designed to help farmers offset the tax charged on certain fuels. Instead of waiting to claim a credit until you file your tax return, you may be able to claim a quarterly refund during the year. The method available to you depends on the type of fuel used.
Solar Energy Credits: If you purchased a solar energy system for your farm, you may be eligible to claim the investment tax credit or the production tax credit. These credits use different methods, but both reduce your tax liability (head over to gov for more information on how they work and how to qualify).
Conservation Reserve Program (CRP): While not a tax credit, the USDA’s Farm Service Agency allows farmers to enroll in CRP in exchange for a yearly rental payment to help offset conservation expenses. The CRP is an incentive for farmers to “remove environmentally sensitive land from agricultural production and plant species that will improve environmental health and quality.” CRP contracts typically last 10 to 15 years.

Are there depreciation rules for recovery periods on assets?

Yes. Check with the IRS for specifics on each — hogs depreciate at different rates than equipment or cows, for example. IRS Publication 225 is a great resource for determining how to depreciate certain assets.

Where do I enter asset depreciation on my taxes?

There are two tax forms to be aware of when claiming depreciation for tax purposes. First, enter the asset information on Form 4562, Depreciation and Amortization. The amount will then flow to your Schedule F, Profit or Loss From Farming.

How would I claim a cow as a business expense?

The answer to how to claim a cow as a business expense depends on several factors. Are you a rancher or a dairy farmer? Did you buy your cow or was it born onsite? Interestingly enough, all these things may play a role in how you classify your farm expenses, including cows.

For example, a dairy cow contributes to a farm’s value over its lifetime, making it a capital asset. That’s why its cost can be claimed through depreciation — typically over a five- or seven-year period. If your cow is raised primarily for sale (a meat cow), it’s considered inventory instead.

What happens when a cow doesn’t survive?

If the cow is born onsite but dies and its meat is not sold, there’s nothing to deduct because there’s no basis (purchase price).

If the cow was not born onsite, the tax treatment depends on the type of livestock:

Dairy cow (capital asset): Record the loss by indicating the livestock was sold/disposed of for no sales price.
Sale cow (meat cow): Calculate the loss as part of lost inventory.

My farm’s yield varies from year to year. How can I prepare for big tax hits?

The IRS knows farm income often varies from year to year. The tax code allows income averaging for farmers and fishers to smooth out those ups and downs. Income averaging allows you to average your income over a three-year period. This can help your bottom line by not taxing you at significantly higher rates during years when your taxable income is higher. You can make this election on your federal tax return with Schedule J — TaxAct® can help guide you through the steps if you use our tax preparation software.

Additional resources for American farmers

Looking for additional help with farm taxes? The IRS has a Farmer’s Tax Guide,  Publication 225, that may provide background for other farm-centric filing asks. TaxAct is also here to help you report your farm income and hang onto more of what’s yours — be it in cash, seeds, or even cows.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

The post Cows, Farming, and Taxes: What You Need to Know appeared first on TaxAct Blog.

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