For most of individuals, tax time is probably as hectic as any family gathering or holiday. You rush around trying to make sure that you have all of your receipts, and that you have received everything you need to actually file the tax return. Even after all of this has been dealt with, there is still one problem that can arise. That problem is being told that you owe the IRS money.

Well, in reality, the problem doesn’t simply come from owing the IRS money, it comes when you owe more than you can really afford. Especially for individuals who do a lot of freelance or contract work where tax are not withheld, it can be a very scary thing to think that you cannot pay your bill to the IRS. This is when the real panic sets in.

The purpose of this article is to explain what you should do when you owe the IRS more than you can easily afford to pay. In addition, it explains the process that most people will experience, and the forms that need to be filled out. Finally, it also explains the dire consequences that can come from ignoring the IRS.

The Bad News

Now, when you find out that you owe money to the IRS, your first instinct is to panic. This is certainly made worse if you do your taxes on your own. At least with a tax professional in front of you, they can give you advice and help to at least calm the panic.

Well, if you are doing your taxes, the first thing to do is to ask how much you afford to pay at once. The more that you actually pay, the better of you will be. The reason for this is that any outstanding balance that you owe to the IRS that cannot be mailed in on April 15th will incur interest and penalties.

It does not matter if you tell the IRS on April 15th, you still face a penalty. The reason for this is that the IRS wants you to insure that you are paying enough taxes throughout the year to prevent this kind of dilemma. Even if you are paid mainly from freelance and contract work where you receive a 1099, they still want you to plan ahead and prevent this problem.

When you owe the IRS money, they view it as a loan. However, unlike a loan that you might get from a bank or on your credit card, the loan that the IRS gives is not at the best rate. In fact, the interest and penalties that you incur from owing taxes comes to about 17%. This is why you are advised to pay as much as you can up front.

Informing the IRS

Okay, so you are in this situation. You know that you owe more than you can pay. You have determined that you can pay some of the bill, but not all of it. So, what do you do? Well, you ask the IRS to set up an installment agreement with you so that you can make monthly payments. And, as with most things with the IRS, there is a form for ask for the installments.

If you owe less than $25,000 in taxes, Form 9465 must be added to your federal tax return. This form is pretty straight forward. It asks for basic information such as how money much you owe overall, how much money you are sending in with your tax return, and the amount that you can pay each month.

Now, if you only owe a few hundred dollars, you can probably get a way with telling the IRS that you can only pay $25 or $50 per month. However, don’t try to put in that you can only pay $10 a month, unless you have some special circumstance. Typically, the IRS tries to get outstanding balances paid in about three years. Of course, the sooner you get it paid off, the less you pay in interest and penalties.

Now, if you owe more than $25,000 in taxes, there is some additional information that the IRS needs. In addition to filing Form 9465, you also need to file Form 433F. This form tells the IRS about all of your assets. Of course, if you owe more than $25,000, you probably need to be working with a tax professional.

In addition to the interest and penalties, there are fees for setting up the installment agreement. There is a $43 initial fee. There are other fees if an installment agreement has to be reinstated due to non-payment or other circumstances.

Finally, it is important to remember that filing the forms for the installment agreement is simply asking for the re-payment option. The IRS can adjust the agreement or make other arrangements. However, if everything on your tax return is normal, you should not have a problem getting the installment agreement.

Ignoring the IRS

First of all, ignoring the IRS when you owe money is the worst thing you can do. Simply not filing a tax return because you cannot afford to pay what you owe will only delay the ineffidable. As once the IRS catches up to you, there will be more interest and penalties, and even other actions—such as having a tax lien put against your assets. The best thing to do is to communicate with the IRS and let them know that you want to take care of the problem.

The Aftermath

Once the IRS has accepted your installment agreement, you will receive a bill every month listing what you owe and how to make the payment. You can pay your monthly installment online through the IRS web site, or by calling the IRS and paying over the phone. In addition, to insure that you don’t forget to make the payment, you can have the installment automatically deducted from your checking account each month.

If you fail to make your payments as required, the IRS can withdrawal their agreement and take other actions to obtain what you owe. In addition, if you find yourself owing more money next year to the IRS, the installment agreement can be extended to include the new amount owed. The IRS may require additional forms so that they can determine your specific financial situation.

The bottom-line on your taxes is to try to prevent owing the IRS money at all. The interest and penalties that accrue are quite expensive when compared to other types of loans. In addition, you do not want to find yourself in a perpetual cycle of paying the IRS. Do everything possible throughout the year to not be caught off-guard on April 15th.