Tax Day 2018 is (finally) over. But if you didn’t pay everything owed to the IRS for your 2017 federal taxes, you haven’t heard the last from them this year.
The IRS announced that tax notices will soon be sent to people who filed on time but didn’t pay their taxes in full. If you fit that description, you’ll likely receive a letter or notice in the mail from the IRS sometime within the next few weeks.
What does this mean for you?
If you filed your 2017 federal taxes on time and paid your taxes in full by the April 18 filing deadline, you probably won’t find a notice from the IRS in your mailbox.
However, if the IRS discovers a correction on your return that increases the amount you owe, you could still get a notice. Keep in mind that if you filed electronically, it may be less likely your return contained common errors.
If you filed your taxes but didn’t pay everything you owe, the bill you receive may include interest and penalties on top of the unpaid balance.
As the IRS notes, interest generally accrues on any unpaid tax, starting from the due date of the return and ending when you pay off the full balance. You can also be hit with a failure-to-pay penalty if you file a return but don’t pay all the tax owed on time.
Why should you care?
IRS interest and penalties can be severe. In fact, paying the tax you owe with a personal loan, for example, may actually be cheaper in the long run than paying IRS interest and penalty fees.
As of April 1, 2018, the IRS charges 5% interest for tax underpayments. Generally, interest begins adding up from the due date of your return until the date you pay your tax in full, and it compounds daily.
It’s important to note that interest accrues on the unpaid tax as well as on any interest or penalties that the IRS charges you for not paying on time. All that interest can add up quickly.
Late or failure-to-pay penalties can also inflate the total amount you owe. The current failure-to-pay penalty is 0.5% of your unpaid tax for every month (or partial month) that the tax goes unpaid, from the due date of the return until the tax is paid in full, up to a maximum of 25%.
That rate can increase or decrease based on different circumstances, such as an installment agreement, but it’s still best to pay your taxes on time and in full to avoid paying penalty fees whenever possible.
What can you do?
If you get a bill from the IRS this summer, the best thing you can do to stop interest and penalties from piling up is to pay the full amount you owe immediately.
The IRS provides several ways to pay.
- DirectPay. This service allows you to pay your tax electronically from your checking or savings account. And it’s free!
- Electronic Federal Tax Payment System. This is another free government service and allows you to pay by phone or online.
- Debit or credit card. The card issuer may charge a processing fee for the transaction, but the IRS doesn’t. Fees vary by issuer.
- Check or money order. The check or money order should be made payable to the United States Treasury (or U.S. Treasury). You can deliver it in person or mail it to the address specified on your IRS tax notice.
If paying in full isn’t possible right now, you may have other options.
- Request an online payment plan. To qualify for the long-term payment plan, you must owe $50,000 or less in combined tax, penalties and interest, and have filed all your tax returns. To qualify for the short-term payment plan, you must owe less than $100,000 in combined tax, penalties and interest.
- Apply for an installment agreement. You may be eligible to apply for an installment agreement through the IRS. The agreed-upon monthly payment can be directly debited from your bank account or paycheck. Fees may apply.
- Ask the IRS to delay collection until your financial situation improves. You’ll likely have to fill out a form requesting the IRS to delay collection and provide proof of your financial situation. The IRS may or may not agree to your request. But even if it does agree, penalties and interest will be charged until you pay the full amount.
- Request an offer in compromise. This could let you pay your tax bill for less than you originally owed. You’ll need to meet stringent eligibility requirements, and the offer terms tend to be similarly strict. The process starts by completing the Offer in Compromise Pre-Qualifier.
Remember: Paying the tax you owe in full by the filing deadline every year is the best way to avoid tax debt, interest and penalties.
It’s a good idea to check your paycheck withholdings to make sure enough tax is being withheld from your paycheck throughout the year. Adjusting your W-4 could help you avoid a big tax bill next April.