Federal income taxes surprise taxpayers every year. You hear of tax cuts, credits, breaks, refunds and allowances, but you cannot anticipate if they will apply to you. When you prepare your federal tax return, you may owe significant money to the Internal Revenue Service for last-year’s taxes. You can choose to make a partial tax payment to the IRS and set up a payment agreement, but there may be better solutions. Review your options before you make a decision.
Failure to File
The most damaging option is to fail to file your federal income taxes timely. Failure to file has the greatest penalty. You are wiser to file and pay nothing than not to file the tax return when due. Failure to file for more than 60 days has a minimum penalty of $135 or 100 percent of the unpaid tax. If you do not file a tax return, eventually the IRS files for you, with no credits or deductions, and proceeds to collect the tax.
Failure to Pay
Another penalty the IRS imposes is failure to pay. This penalty is one-half of 1 percent a month for each month you fail to pay, up to 25 percent. You can avoid this penalty by paying 90 percent of your tax liability at tax time.
You may choose to make partial payment for the taxes owed. The IRS recommends that you pay as much as you can to avoid interest and penalties. You may e-file your taxes and pay with a personal check by mail or you may pay with credit card or bank draft. Pay whatever you can and however you can to keep the penalties and interest as low as possible.
Penalties and Interest
Penalties and interest add significantly to your taxes if you do not pay timely. You are wise to figure out a way to pay quickly to stop the interest and penalty accrual. Interest hovers around 4 percent but can change quarterly, and the first quarter of 2011 is 3 percent, according to Tax Almanac.
Online Payment Agreement
The IRS has an installment agreement available if you choose. This agreement has a front-end fee of $105, or $52 for bank account automatic withdrawal. Even the IRS suggests you may be wiser to borrow money for payment of your taxes. The penalty and interest continue for failure to pay, and the IRS can levy a federal tax lien against your property although you have an agreement in place. If you miss an installment, the IRS charges a fee to reinstate your agreement. The agreement should be an option of last resort.