Though the majority of Americans wind up getting a refund on their taxes, there are also those who end up owing money to the IRS once their returns are completed. If you're staring at a tax bill you know you can't pay, don't panic. Though you will face interest and penalties by being late with your payment, you also have options for making that tax debt more manageable, whether it be in the form of requesting an offer in compromise or setting up an installment plan.
How an offer in compromise works
As the name suggests, an offer in compromise is an arrangement wherein you request that the IRS reduce your tax bill, and the IRS agrees to forgive the portion you're unable to pay. Though an offer in compromise might sound like the perfect solution to a giant tax bill, you should know that you'll need to meet certain criteria to have one accepted. Namely, you'll have to really prove to the IRS that you don't have the income or assets to pay that bill, or that paying your debt in full will constitute an extreme financial hardship.
Once you decide to request an offer in compromise, you'll need to submit a host of information to the IRS (including Form 656, where you ask for that tax debt reduction in the first place) so that the agency can verify not only your tax debt, but your means of paying it (or lack thereof). If the IRS accepts your offer, then you'll need to pay your bill as per the terms dictated by it. If your offer is rejected, you have the option to submit a new offer or appeal the decision. Either way, be prepared with a backup plan, because unless you meet some pretty strict guidelines, you'll probably end up on the hook for your tax bill in its entirely.
How installment plans work
If your IRS offer in compromise is rejected, or if you decide not to file one in the first place because you know you won't qualify, then you have the option to request an installment plan. An installment plan allows you to pay off your tax debt over time, as opposed to having to come up with a lump sum on the exact tax filing deadline (which, this year, is April 17).
The good news is that a short-term IRS payment plan -- one in which you're repaying your debt in 120 days or less -- is free to set up. A longer-term plan can cost you up to $225, but if you're a low-income taxpayer, that fee is reduced significantly. Once you set up your plan, you'll need to start making payments according to its terms, keeping in mind that the longer is takes you to pay off your tax debt, the more money you'll lose to interest. Still, it's a better option than being late with your payment and subjecting yourself to penalties for that reason alone.
To arrange an installment plan, simply fill out Form 9465 and follow its directions accordingly. The IRS will generally respond within 30 days of receipt letting you know whether your request is approved or denied.
One mistake you shouldn't make
If you're starting at a major tax bill, you may be inclined to charge that expense on your credit card rather than deal with the IRS. Don't. The interest you'll pay the IRS under an installment plan can be as little as 25% of what your credit card company will charge you, depending on the terms of your agreement, so if you can't pay what you owe in full, resist the urge to whip out the plastic. Not only can charging your tax bill on a credit card cost you more money, but it could, in some cases, end up damaging your credit. Therefore, you're better off working with the IRS directly.