If you have a tax liability, you have several options for paying it. The IRS provides relatively straightforward instructions on the various types of payment methods and other ways to discharge the liability.
In California, you can also deal with the Franchise Tax Board, the Board of Equalization, and the Employment Development Division.
- Straight payment or payment in full
- Payment or installment plan
- Offer in Compromise
Straight Payment or Payment in Full
The most efficient option to pay off any tax debt is to pay it in full, all at once. If you pay after the deadline, you will incur interest and penalties.
As soon as your liability is paid off, your account returns to good standing right away.
The IRS will accept payment by credit card if you wish. It accepts American Express, Discover, MasterCard, and Visa. You can pay by phone, the internet, or when e-filing.
You can also pay using a personal loan, a home equity line of credit, or a loan from your retirement account. Compare rates against an installment plan first.
Impractical if you cannot pay the entire balance nor qualify for a loan. Paying with a credit card incurs interest from your credit card.
You could lose your home by defaulting on your home equity loan.
Always file your return with the IRS even if you cannot pay the taxes. The IRS charges steep penalties for failure-to-file.
You can ask for a monthly payment or installment plan to pay off your tax liability. To be eligible for an online payment agreement with the IRS an individual must owe $50,000 or less in combined individual tax income, penalties, and interest. Businesses must owe $25,000 or less in payroll taxes.
If an individual or business owes more than the eligibility limit, installment payments are made using the correct form and a check, money order, or credit card (IRS). A small business with employees can apply for an in-business trust fund express installment agreement, which does not require a financial statement or financial verification to apply.
You should make every effort to pay at least the minimum payment on time every month and to file all your tax returns on time.
The IRS will not enforce collection action in the following circumstances:
- When an installment agreement is being considered
- While the agreement is in effect
- For 30 days after a request for an installment agreement is rejected
- During the period the IRS evaluates an appeal of a rejected or terminated agreement.
The IRS recommends using a direct payment option in which the monthly amount is taken directly out of your bank account. The cost is lower with a smaller setup fee.
There is a fee for setting up an installment plan, and the unpaid balance continues to accrue interest which compounds daily. If you default, there may also be a fee for reinstatement of the agreement.
If you allow your payments to lapse, the IRS may file a Notice of Federal Lien which can then be reported on your credit report.
The IRS can also take money from your bank accounts, wages, and any other income as well as seize assets.
The BOE requires you to make payment in full within 24 months if you are an in-business taxpayer. If you are out of business, you could arrange a longer payback period.
All user fees increased on January 1, 2017, and a new fee was added to the list: the restructured/reinstated low-income installment agreement.
Offer in Compromise
An Offer in Compromise (OIC) allows you to settle your tax debt for less than the full amount in certain circumstances:
- Reasonable doubt that the tax liability is correct
- Doubt the taxpayer can pay the debt
- Paying the debt would cause a financial hardship to the taxpayer
The IRS considers several things in granting an OIC:
- Ability to pay
- Asset equity
The IRS will only agree to an OIC if they determine they will not be able to collect the amount due within a reasonable time. It rejects from 80% to 90% of all OIC applications.
The IRS has a pre-qualifier tool on its website so you can check your eligibility before applying.
California’s three taxing agencies developed a common application form you can use for any state agency to apply for an OIC with the state.
An open bankruptcy case makes you ineligible for an OIC.
The fee for setting up an OIC is $150. If you propose a lump sum payment in five or fewer installments, you must include a non-refundable payment equal to 20% of the offer. If you take more than five months, you must still make the first proposed installment with your application.
While the IRS evaluates your Offer In Compromise, you must make additional non-refundable payments and the IRS could take up to 24 months to make a determination.
EDD eligibility requires that you cannot be charged with any type of EDD fraud or employment fraud. Also, you must be out of the specific business that generated the deficiency.
The FTB and BOE consider the same information as the IRS when determining eligibility with the following additions:
- Future income
- Future expenses
- Potential for changed circumstances
- Whether the offer is in the best interest of the state
The FTB may ask you to enter into a collateral agreement for a term of five years if your future earnings could increase substantially. You must pay a lump sum with a cashier’s check or money order. The agency can take 90 days or more to decide whether to grant your OIC.
The BOE requires that you disassociate yourself from the business that incurred the liability as well as any similar business. You cannot dispute the amount you owe. It will only grant an OIC if you cannot pay the full amount owed in a reasonable time.
The BOE may grant an OIC for other issues through January 1, 2018.
The BOE holds all funds in deposit; if the offer is rejected the deposit is refunded. However, credit interest will not be paid to you. You may be asked to pay court fees for a Stipulation of Judgment.
You may be able to request a short-term extension if you think you can pay your taxes in full within 120 days or less. The IRS rejects a majority of these requests.
The BOE allows for a hardship suspension, but interest continues to accrue on the account.
While there are several options for paying your tax liability, your most cost-effective payment method is to pay in full on time. Any balance in arrears will incur interest and penalties. The requirements of the IRS and the three California agencies can differ in detail. If you find yourself owing a large tax debt, consulting an experienced tax attorney to help you through the process can take some of the pressure off.