Beware of IRS Fees When You Can’t Pay Your Taxes
Each year, about 30 million taxpayers file and owe the IRS. For those who owe, the IRS allows you to make “other” arrangements if you can’t pay.
Arrangements can include payment plans, extensions to pay, or hardship agreements such as payment deferral (called “currently not collectible” status) or an offer in compromise. Many of these payment arrangements come with fees, so it’s helpful to know what you’re in for when making arrangements with the IRS.
Fees for paying immediately
There is never a fee to pay the IRS with a check or directly from your bank account (see the IRS Direct Pay option). However, if you must pay with your debit or credit card, there are fees charged for using any of the three IRS approved payment processors. Credit card payments can be quite expensive because the processors charge a minimum fee or 1.87% to 1.99% of your payment to process the transaction.
Payment arrangement fees and exceptions
Unless IRS rules consider you to be a low-income taxpayer, most payment arrangements require a setup fee with the IRS. However, there is no fee if you just ask for an extension of time to pay (the IRS can give you an extension of up to 120 days).
Currently not collectible
There is also no fee if you can prove to the IRS that you are “currently not collectible.” Currently not collectible (CNC) status will mean that you don’t have to make payments to the IRS until your financial situation improves. To obtain CNC, you must prove to the IRS that you can’t pay based on your current income and necessary living expenses.
Installment agreement fees
The IRS sometimes calls their payment plans installment agreements. The IRS will grant an installment agreement on any balance owed. However, if you cannot pay it all within 6 years or owe more than $100,000, the IRS will usually want detailed financial statements and supporting information. If you owe more than $50,000, the IRS will probably insist that you use your assets, especially liquid assets like cash and investment funds, to pay down the balances owed.
There is a fee to set up an installment agreement. If you meet the IRS low income criteria, the setup fee is waived. There is also a fee if you default on an installment agreement and need to reinstate it, although it may be waived or reimbursed for low-income taxpayers. Taxpayers commonly default on installment agreements if they miss a monthly payment or if they file another return with a balance due.
The IRS has incentives to set up payment plans online using their Online Payment Agreement application and for direct-debit payments. Installment agreement user fees range from $225 for a payment arrangement set up by phone or mail and paid by monthly checks to $31 for a payment agreement set up online and paid by direct debit.
For low-income taxpayers who are unable to do a direct debit agreement, the IRS will reimburse installment agreement fees once the installment agreement is complete.
Saving money on installment agreement fees
The key here is to use the IRS online tool to apply for your payment plan and use direct debit to pay it. This will be the lowest cost option. Keep in mind that the user fee will usually come out of your first payment installment, so it’s not something you need to pay separately for.
Offer in compromise fees
If you qualify for an offer in compromise (OIC) to settle your taxes for less than the full amount owed, the fee is $186. OICs also require you to pay a part of the settlement amount with the offer application. The fee and settlement portion can add up to a hefty upfront cost.
You must decide one of two ways to pay for an OIC when you apply using IRS Form 656. The first is the lump-sum cash payment option which requires you to pay 20% of the offer amount with the OIC application. The second is the periodic payment option that requires you to submit the first payment with the offer amount, and make monthly payments in accordance with the proposed offer terms.
OICs also have waivers which allow eligible low-income taxpayers to avoid OIC fees and upfront payments of the offer amount with the application.
Interest and the failure to pay penalty
The hidden costs with all IRS arrangements are interest and the failure to pay penalty. If you settle your taxes with an OIC, you do not have remaining interest and penalties. Interest and penalties are settled when the OIC is approved and no balances remain.
However, for all other arrangements, interest (currently at 5%) and failure to pay penalties accrue until the final balance is paid (including penalties and interest). The failure to pay penalty is 0.5% per month, with a maximum of 25%. You can reduce the failure to pay penalty by getting into a payment arrangement with the IRS. While you are in a payment arrangement, the IRS cuts the failure to pay penalty in half.
Need help with an IRS payment arrangement?
It’s best to make arrangements immediately after you file and know you can’t pay the balance. If you can’t pay, it may be best to get help from a tax pro who can help you sort out what options are best for you. Tax pros can sort out your details and work with the IRS to get you the best outcome for your situation.
Learn more about H&R Block’s Tax Audit & Notice Services. Or make an appointment for a free consultation with a local tax professional by calling 855-536-6504 or finding a local tax pro.
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Related tax terms
IRS Collection Financial Standards
Direct Debit Installment Agreement (DDIA)