Not paying your taxes

You’ve had your taxes prepared and there is a balance due to the IRS or California FTB. You don’t have enough money to pay the taxes today. What are your payment options and how much is this going to cost?

Options

Pay the taxes with a credit card

Pay the taxes within 120 days

Pay the taxes in installments over the next few years

Hide under a rock and hope that the IRS does not find you.

(Not a real option).

The credit card option

If you pay your taxes with a credit card there is a “convenience fee” charged by the credit card company. The fees are about 2.5% of the payment. Payments made with a credit card are treated the same as any other type of payment. No additional amounts will be due to the government.

Pay in 120 days option

If you can pay all of your federal income taxes due within 120 days the IRS will hold off on any type of collection actions and requires only that you contact them and notify them that the balance due will be paid within 120 days.

Pay in installments option

If you need to make payments over a period longer than 120 days the IRS will require that you enter into an installment agreement. There is a fee of $105 to set up an installment agreement. The fee is reduced to $52 if you make payments through an electronic debit from your bank account. Certain low-income taxpayers can qualify for a reduced fee of $43. California charges a fee of $20.

Hide under a rock option

This is not a good option. The primary reason is that the IRS has satellites that can find you under even the smallest rock. (In case you did not recognize it, this is accountant humor.)

Penalties

There is a penalty charged by the tax agencies for not paying your tax liability on time. This is known as the failure to pay penalty.

IRS first. The penalty for not paying your federal income tax on time is 0.5% per month. The penalty is assessed for each month (or part of a month) that your taxes remain unpaid. There are two circumstances where the penalty rate changes. First, if you enter into an installment agreement with the IRS the penalty rate will drop to 0.25% per month. Second, if you receive a Notice of Intent to Levy (Notice CP-504) the penalty rate accelerates to 1.0% per month.

The maximum penalty imposed for failure to pay your taxes on time is 25% of the unpaid tax.

California next. California conforms to some of the federal rules. The California penalty is 5% plus 0.5% per month. There is no special reduction for entering into an installment agreement. The maximum penalty imposed for failure to pay your California income taxes is 25% of unpaid tax.

Interest

Interest is charged on any taxes not paid on time from the due date of the tax return until the date paid. Payments mailed on or before April 18^th, 2011 or balance due tax returns will be considered made timely even if received by the IRS after April 18^th, 2011. The current interest rate is 4%. Rates are subject to change every three months.

If you do not pay the balance due with your federal income tax return the IRS will send you a notice requesting payment and will include any penalties and interest. No additional interest will be charged if the amount shown on the notice is paid within 21 calendar days from the date of the notice (10 days if the amount due is $100,000 or more).

California rules are the same as the IRS. California adjusts the rate of interest charged on twice each year. The rate is currently 4% through June 30, 2011.

Government Guarantees an Installment agreement

Congress mandated that the IRS allow certain taxpayers to make payments on balances due on their current year income tax returns. There are certain requirements to qualify for the guaranteed installment agreement:

• The liability must be $25,000 or less (tax only, not penalties & interest),

• Taxpayer has timely filed & paid all liabilities for last five (5) years,

•  IRS may request financial statement – but generally does not,

• The installment agreement will pay the liability within three (3) years, and

• The taxpayer agrees to comply with all tax laws while the agreement is in place.

The Scarlet Letter – filing of a notice of federal tax lien

The IRS and California FTB can file a Notice of Federal Tax Lien or Notice of State Tax Lien when a tax liability has not been paid. Liens can be filed even when there are installment agreements in effect to resolve any outstanding liabilities. Tax liens will appear on credit reports and have a significant negative impact on your credit score. Generally, the IRS will not file a lien for most liabilities of less than $25,000.

Questions?

If you have balance due on your income tax return that you cannot pay it is important to have a qualified tax professional on your side. Enrolled agents are licensed by the Department of the Treasury to represent taxpayers before the IRS. Mark F. Seid, EA CPA TCP and Virginia Bell, EA are both enrolled agents and are uniquely qualified to assist you with resolving balance due issues with the IRS and FTB.