Options for Employees and Retirees Unable to Pay the 2021 Federal Income Tax Balance Due
Edward A. Zurndorfer
The 2021 federal income tax filing deadline is less than one week away on April 18, 2022. While most federal employees and retirees have already filed their 2021 tax returns, there are some employees and retirees who have not, and will either finish and submit their returns before April 18 or will be requesting a six-month filing extension until October 15, 2022.
There may also be some employees and retirees who have prepared or had their tax return prepared by a tax professional and who have a sizeable balance due on their 2021 federal income tax return. They are unable to pay the federal income tax balance due on their 2021 federal income tax returns. The question facing these individuals: What should they do if they cannot afford to pay the balance due on their 2021 federal income tax return?
What individuals who cannot afford to pay the federal income tax due should not do is to avoid taking any action altogether. They should either file a completed return or file for an extension and pay as much of the as possible of the balance due with the tax return or filing extension. For individuals who file their return but who do not pay with the return any or all of the balance due, the IRS will send these individuals a notice of the tax due. Individuals who receive such notices will have to pay the tax due plus an interest penalty (equal to the current federal rate) and a late-payment penalty of 0.5 percent per month (maximum 25 percent penalty). While the penalty may seem harsh for not paying the balance due when filing the return, the penalty is more reasonable and likely more affordable compared to not filing the tax return and subsequently receiving an IRS penalty notice for not filing.
Another option is to pay the balance due by credit card. The cost for this option is the percentage of the tax as a convenience fee plus any interest charges imposed by the credit card company for not paying the credit card charges on time.
There are several types of payment agreements that individuals owing federal income taxes can make with the IRS. These agreements are presented here:
- Guaranteed installment agreement. Internal Revenue Code (IRC) section 6159(c) requires that the IRS accept a proposed installment agreement from an individual who owes income tax of less than $10,000. The individual must agree to fully pay the total tax due within three years, has not entered into an installment agreement within the preceding five years, has not failed to file an income tax return or pay any tax shown on such returns during any of the preceding five years, and agrees to file and pay all tax due on tax returns for all years during the term of the agreement. The dollar limit applies to tax only; penalties or interest, associated or accrued, does not count.
- Online payment agreement. An individual’s specific tax situation will determine which payment options are available to him or her. Payment options include paying in full, requesting a short-term agreement to be paid in 120 days or less, or a long-term agreement for the tax to be paid in more than 120 days. An individual may qualify to apply online.
- Short-term agreement (paying tax due in 120 days or less). The amount owed is less than $100,000 in combined tax penalties and interest. There are no set-up fees, but penalties and interest accrue until the balance is paid in full. Payments can be made via automatic payments from a checking or a savings account, EFTPS or check, money order, or debit/credit card. For balances over $25,000, automatic payments must be made from a checking account. The online application is available at www.irs.gov.
- Long-term agreement (paying tax due in more than 120 days). The amount owed is $50,000 or less in combined tax penalties and interest, and all required returns have been filed. There is a set up fee of $31 if paid through direct debit or $149 if direct debit is not used. Penalties and interest accrue until the balance due is paid in full.
Submitting Form 9465 (Installment Agreement Agreement)
Those individuals who cannot or choose not to use the IRS Online Payment Agreement application system can completed and submit IRS Form 9465 (Installment Agreement Request) to request a monthly installment plan. If the amount owed is more than $50,000, then IRS Form 433-F (Collection Information Statement) must be attached to Form 9465, and then Form 9465 cannot be filed electronically. In general, if the total amount owed is greater than $25,000 but not more than $50,000, payments for the taxes due are made by direct debit, or by payroll deductions using IRS Form 2159 (Payroll Deduction Agreement). A payroll deduction agreement is not available if Form 9465 is filed electronically.
Interest and late payment penalties continue to apply during the installment period. While an installment agreement is in effect, the late payment penalty is 0.25 percent per month. This assumes the individual’s tax return for the year in question was filed on time. If the individual’s tax return for the year in question was not filed on time, the penalty is 0.5 percent per month.
Extension of Time to Pay Balance Due on 2021 Federal Income Tax Return
An individual can request a six-month extension to pay the federal income tax due on their 2021 tax return by filing IRS Form 1127 (Application for Extension of Time for Payment of Tax Dueto Undue Hardship). The individual must show that he or she cannot sell assets or borrow to pay the tax except under terms that would cause severe loss and undue hardship. Statements of assets, liabilities and receipts, and disbursements for three months preceding the due date of the tax are required. Form 1127 must be filed by the due date for payment. For the year 2021, this means Form 1127 must be submitted no later than April 18, 2022. An approved extension for payment eliminates the late payment penalty but has no effect on interest charges.
Individuals who have additional questions regarding payment options on any 2021 federal income taxes they may owe and cannot pay at this time are advised to contact a CPA or IRS Enrolled Agent as soon as possible.
Edward A. Zurndorfer is a Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While the employees of Serving Those Who Serve are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.