For each tax payment you must send a separate check or money order. Made out to the United States Treasury. Write your Social Security Number; type of payment or form that it is, 1040 or estimated tax; the year; and your daytime phone number on the check. Use the payment voucher, IRS Form 1040-V, when sending a check with your tax return and do not staple the check to the tax form. Clear identification of which tax and year you pay is very important.
Two alternative methods are becoming popular ways to pay your tax bill. You can pay electronically if you file by phone or e-file. The amount will be withdrawn from your bank account on the date you specify. This one time payment plan incurs no additional fee. Credit card payment is offered by calling 1-888-2PAY-TAX where you can charge your tax bill to MasterCard, American Express or Discover. There is a fee charged by the non-IRS vendor providing this service. You may use this method for estimated tax payments or when filing an extension. The IRS does not receive your credit card number.
To lower interest and penalty charges, it is best to send as much of the payment as possible when you file. However, what do you do if you cannot pay the entire bill on time? For tax bills under $25,000, you may wish to use an installment plan which is available only if you can pay the balance plus interest and penalty within five years.
The IRS has a simple process for taxpayers who apply for an installment plan. Use IRS Form 9465, “Installment Agreement Request,” and attach it to the front of your tax form. When you establish an installment agreement, there is a $43 service charge. You may pay by check each month or have the amount withdrawn automatically from your bank account. At the time the IRS approves your request, the penalty for late payment drops from .5% to .25%. You will also be required to pay interest at the federal short-term rate plus 3%. This plan will also keep the IRS from filing a tax lien. The key problem with this approach is in making all your payments in a timely fashion. If you get behind with your installment payments, the IRS will generally seek full payment on the unpaid balance.
What can you do if your financial situation has dramatically changed and you are unable to pay the tax or meet an installment payment plan? Your last option may be to apply for an offer in compromise. This is a special IRS program where you pay less than your full tax liability. You can pay this in one lump sum or under a payment plan. You fill out IRS Form 433A, “Collection Information Statement for Individuals,” to provide your personal financial information. The IRS will then review your assets and your ability to pay. Your future earnings’ capacity will also be considered. A “bad year” does not give you adequate reason for making an offer in compromise. Your assets may be verified and your family living expenses will be compared to the IRS standards. These standard living costs will be used to calculate the amount of “excess” funds you have to use for payment. You will also need to complete the IRS Form 656, the “Offer in Compromise.”