What do I do when I owe the IRS? (Information, FYI, Payment Plans, ETC)

 

Owing the IRS can be scary but I’m here to help calm some of those fears by giving you the information needed to set up a payment plan or to give you information about what to do when you owe the IRS so that it’s not so scary. 

Pay As You Go System

The IRS considers taxes a “pay as you go system,” which means you are expected to pay all of the taxes that are due to you during the tax year to prevent yourself from owing. Paying during the year helps you so that by the time tax season rolls around and you get ready to file your Tax Return, you’ve already paid everything and there’s no additional balance.

So we already see this “pay as you go system” with people who are working for an Employer and receive a W2. Taxes are automatically being taken out of their paycheck so that when they get ready to file, they’ve already prepaid this during the year. But for people who are self-employed, it just does not work like that because we are getting all of our income in our pocket. We are responsible for paying those taxes or making quarterly estimated tax payments to prevent us from owing a balance when we get ready to file. For new Entrepreneurs, this can be scary and frustrating. Cash flow can be an issue and circumstances beyond your control could make it so that you may end up owing a balance.

See below some of your options if you owe the IRS a Balance.

There are two types of payment plans that you can request. 

  • An extension of time to file (Short-term)
  • An installment agreement (Long-term)

An extension of time to file is called a short-term payment plan, which is where you are expected to pay your balance within 180 days or less. The short-term payment plan is unstructured which means that within the 180 day timeframe, you can make your payments in any increments small or big, so you can pay any way you want. The IRS just wants you to pay in full within the 180 day timeframe

So there is no set up fee to set up this payment plan. You can apply online or you can apply by calling and you can set this payment plan up on your account. Having this payment plan will update your account and will prevent collection action from being taken on your account, but it will not stop penalties and interest from accruing until the balance is fully paid.

The second payment option is an installment agreement where you would be paying a monthly structured amount by a certain date of each month. There is a fee to set this up and you will be making monthly payments. So it’s not unstructured like the extension.

You will have to make a one payment to the IRS on a certain due date of each month. See above the applicable fees when setting up an installment agreement.

 

FAQs:

Why do I owe penalties and interest?

Penalties and interest will continue to accrue on the account because it’s still late, meaning that it’s past the April 15th due date. So the payment plan is not to stop the penalties and interest from accruing on the account. The payment plan is to set up your tax account so that it’s in a payment plan status.That lets the IRS know that you’re in a payment plan and you are making payments towards your balance to essentially prevent collection action on your account. 

If you did not have a payment plan, then over time the IRS will continue to send you notices and then your account could go into collections where they could take collection action on your account. Having the payment plan updates your account into a non collection action status.

How to apply? 

 

If there are more questions you can go to The IRS Website that gives you more information.

 

 

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