Owe Money on Your Taxes? Here Are Your Options

Many people who file taxes wind up getting money back from the IRS. But a tax refund isn't a given. And you may end up owing money on your taxes instead of being due money back.

Having to pay the IRS can be a bummer. But if you have the money, it may be a matter of writing the agency a check and calling it a day.

What if you don't have the money, though? In that case, you really don't want to ignore your tax debt. Doing so could get you penalized and result in wage garnishment.

Instead, it's important to contact the IRS to work through your options. Here are some you should know about.

1. A short-term payment plan

If you think you can pay off your tax debt in 180 days or less, then you may want to set up a short-term payment plan with the IRS. You won't have to pay a fee to set up a short-term payment plan, though you will accrue interest and penalties on your unpaid taxes until your bill is paid off.

The late payment penalty (also known as a failure-to-pay penalty) is worth 0.5% of your unpaid tax debt for each month or partial month you're late, up to a maximum of 25%. That fee is in addition to interest. The interest rate, which is adjusted quarterly, is currently 4% per year, compounded daily.

2. A long-term payment plan

If you don't think your tax bill is payable in 180 days or less, you'll need to apply for a long-term payment plan or installment agreement. In that case, your fees to set up that plan will hinge on the arrangement you choose.

If you choose Direct Debit, which has monthly payments coming out of your checking account automatically, you'll face a $31 setup fee if you apply online. Applying by phone, mail, or in person will cost you $107. That fee may be waived if you qualify as a low-income filer. Keep in mind that any setup fee you incur is in addition to interest and penalties (the same rate and 0.5% per month or partial month system described above).

There's a second option to make your monthly payments directly (but not have them debited automatically) from a checking or savings account, make payments electronically online or by phone, or pay by check, money order, debit card, or credit card. Here, you're looking at a $130 setup fee if you apply online or a $225 setup fee if you apply by phone, mail, or in person. Plus, you might incur extra fees for paying by credit card.

And again, these fees are on top of interest and penalties. If you're a low-income filer, you'll only face a $43 setup fee, and it may be reimbursed.

3. An offer in compromise

With an offer in compromise, you ask the IRS to settle your tax debt for a lower total than what you owe. At first, this might seem like your best route, since it means paying less. But as you might imagine, the IRS doesn't let people off the hook so easily when they owe money. So if you're going to ask the IRS to lower or eliminate your tax debt, there needs to be a good reason for it.

Usually, an offer in compromise will only work if you can prove to the IRS that your debt isn't payable (such as if an injury or disability has rendered you unable to work on a long-term or permanent basis), or if you can prove that paying your tax bill will constitute an undue financial hardship. So all told, this is an option you can discuss with a tax professional, but it's really not one the typical person who owes money should count on.

It can be stressful and disappointing to owe money on your taxes. But you do have options if you can't pay right away. The key thing is to reach out to the IRS and get onto a payment plan that works for you. As long as you make your payments, you'll be considered current, which means the IRS won't seek to go after your wages to get repaid.