IRS Payment Options to Stop Penalty and Interest
Dealing with the IRS can be stressful, especially if you owe taxes and want to avoid penalties and interest. Fortunately, the IRS provides multiple payment options that allow taxpayers to resolve their debt while minimizing extra charges. Understanding these options can save you thousands and prevent further complications.
Why Penalties and Interest Accumulate
The IRS charges penalties and interest on unpaid taxes. These include:
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Failure-to-pay penalty: Typically 0.5% of unpaid taxes per month.
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Failure-to-file penalty: Usually 5% of unpaid taxes per month if your return is late.
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Interest: Calculated daily on any unpaid balance, including penalties.
By acting proactively, you can stop or reduce these charges.
IRS Payment Options
1. Installment Agreements
If you cannot pay your tax bill in full, an installment agreement allows you to pay over time. Key points:
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Monthly payments are based on what you can afford.
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You can apply online using the IRS Online Payment Agreement tool.
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Setting up an agreement stops new failure-to-pay penalties, though interest continues to accrue.
2. Offer in Compromise (OIC)
An Offer in Compromise lets you settle your tax debt for less than the full amount you owe if paying in full would cause financial hardship. Requirements include:
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Proof of income, expenses, and asset values.
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Submission of IRS Form 656.
Learn more at the IRS Offer in Compromise page.
3. Currently Not Collectible (CNC) Status
If you cannot pay anything due to financial hardship, the IRS may place your account in Currently Not Collectible status. This temporarily stops collection activity, including garnishments and levies. Interest and penalties continue, but enforcement is paused.
4. Partial Payment Installment Agreement
If you can pay part of your tax debt, the IRS may allow a partial payment installment agreement. It reduces monthly payments while working toward resolution.
5. Electronic Federal Tax Payment System (EFTPS)
For regular, manageable payments, consider EFTPS, which allows you to schedule federal tax payments online. Visit EFTPS.gov.
Tips to Minimize Penalties and Interest
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File your tax return on time, even if you can’t pay in full.
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Communicate proactively with the IRS. Ignoring notices increases penalties.
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Consider consulting a tax professional for complex situations.
Bottom Line
Choosing the right IRS payment option can significantly reduce penalties and interest while keeping your tax account in good standing. Acting early and exploring options like installment agreements, offers in compromise, or CNC status ensures you maintain financial control and avoid costly mistakes.
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