8 Tips to Save Money On Your Tax Debt

axpayers can owe money to the IRS for many reasons. They may have difficulty paying taxes when due, receive bills from the IRS for amounts not owed, or owe interest and penalties on amounts paid late. Here are some smart ways to deal with the IRS when you owe money...

Tip #1: Avoid incurring the late-filing penalty by obtaining an extension to file your return.

Obtaining an extension does not permit you to pay taxes late. You must pay the tax you owe with the extension to avoid interest and late payment penalties. The late-filing penalty is 5% of the tax due, per month, with a maximum penalty of 25%. For late payment, the penalty is 0.5% of the tax due and not paid by the due date, per month, with a maximum of 25%, plus interest. (The current IRS rate is 7%.)

Tip #2: Stop penalties running on a late-filed return by delivering it to a local IRS office.

Always obtain a receipt for the return. Returns filed on time are deemed filed when they are mailed or when delivered to an authorized carrier, such as FedEx. However, returns filed late are deemed filed when they are received by the IRS. So, deliver a late return in person.

Tip #3: If you cannot pay the tax due with a return, attach Form 9465, Installment Agreement Request.

Responses to such requests are based on the amount of tax you owe. As long as you do not default, the IRS does not report an installment agreement, so your credit rating will not be affected. How it works...

The IRS will accept all requests for installment payments over a period of no more than 60 months if you owe less than $10,000.

If you owe more than $10,000, the IRS does not have to accept the proposed installment arrangement.

If you owe more than $25,000, you must also prepare and file Form 433-F, Collection Information Statement, which includes substantial financial information.

To request an installment payment for amounts due from an IRS notice, file Form 9465 separately from your return. If granted, the IRS charges $105 for all installment agreements ($52 if your payments are made by electronic funds withdrawal), or $43 if your income is below a certain level. Various criteria determine this level. To see if you qualify, fill out Form 13844, Application for Reduced User Fee for Installment Agreements. Of course, the IRS charges interest on the unpaid amounts.

Tip #4: Use IRS payment plans if you need to make your payments over more than 60 months, or to create an online payment agreement or a payroll deduction installment agreement.

Unlike the installment agreement, a payment plan is not automatic -- the IRS has to agree to it. To qualify, call the IRS at 800-829-1040, or visit the IRS Web site, www.irs.gov, and use the pull-down menu under "I need to... " and select "Set up a payment plan."

Tip #5: Apply for an "offer in compromise" to settle past-due taxes for less than the full amount due.

Make the application on IRS Form 656, Offer in Compromise. The IRS accepts offers in compromise if it is unlikely that the tax due will be collected in full and the offer represents a reasonable way to settle the matter. The decision is based on the tax­payer’s resources.

Caution: This is a lengthy process that requires significant documentation. Filing for an offer in compromise doesn’t affect your credit rating. But, most people who file for one already have IRS liens filed against them, which does affect their rating.

Tip #6: Escape IRS penalties by demonstrating "reasonable cause" for late tax filing.

Abatements for multiple years’ late filings are more difficult to obtain, but not necessarily impossible.

How to do it: Use an experienced tax professional to assist you in applying for the penalty abatement. A pro will know which reasons -- such as an illness, a death in the family, unavoidably lost papers -- are more apt to be accepted, and which, such as you’re too busy at work, are automatically rejected.

Tip #7: Taxpayers who missed the deadline to file because they lacked necessary information, but who know they owe money, can make "legitimate and reasonable" estimates of the missing income and expense amounts to minimize late-payment penalties.

This includes estimates of information on missing W-2, 1099, or K-1 forms. You can file an amended return within three years from the filing date of the return on which you estimated, to report the actual amounts.

Tip #8: Avoid the "trust fund liability trap" by making sure that you don’t appear to be a "responsible person" under this provision if you’re not.

Owners and "responsible" persons are personally liable for an organization’s unpaid withholding taxes. This is known as the Trust Fund Recovery Penalty. It applies to for-profit businesses as well as nonprofit groups. To hold you liable for these unpaid taxes, the IRS must find...

That you were responsible for making the missed tax payments and...

That you acted willfully in not ensuring that the taxes were paid.

Caution: The IRS can make liable for unpaid payroll taxes those employees who have no stock ownership in the company but who had the authority to sign the organization’s checks. Make sure you never are in a position to sign checks or direct where payments will be made.

Further Reading:

What Are My IRS Payment Options?

Let's Settle This: The Offer in Compromise

Behind on Payroll Taxes? Your the IRS' New Target