When You Owe Additional Taxes

You may need to write a check to the IRS.

If you will receive a refund from the IRS, the earlier you file your return, the more quickly you will get your refund check. On the other hand, if you will owe money to the IRS, there's really no good reason to file your return before the April 15th deadline.

Even if you have money withheld from your paycheck, you may still owe additional taxes if you have not had enough withheld, or if you have income from investments, capital gains, and bank account interest. To determine the best time for you to file, you should do at least an estimate of your total tax liability and the amount you have already paid to the IRS early in the year.

If you will owe more than $500 when you file your income tax return, you should either change the amount of your withholding or file estimated tax payments. Together, these payments should equal the amount of your annual tax liability.

Generally, estimated tax payments are made by filing Form 1040-ES on a quarterly basis, along with 25 percent of what you expect to owe at the end of the year. If your income varies widely, you are permitted to make estimated tax payments as income is earned (you can also pay the full amount at the beginning of the year, but there's generally no good reason to do so). For more information about estimated taxes, you can visit your local IRS office, or contact the IRS at the number listed in the back of the instruction book accompanying your Form 1040.

If you owe more than you expected to when April 15th rolls around and can't pay the full amount, file your return and send in as much of what you owe as possible. Failing to file a return or pay taxes can subject you to some very stiff financial penalties, including a fine of up to 25 percent of the total amount of taxes you owe, 1/2 percent per month as a penalty for late payment, and interest charges of seven percent annually.

If you don't have the money on hand and there's no good way to raise it, you should inform the IRS as soon as possible of your predicament. If your inability to pay is due to long-term unemployment or other hardship, you can file Form 1127, "Request for Extension to Pay Taxes." You can receive an extension to pay your tax bill until June 15th by filing this form. Or you can file Form 9465, requesting an installment plan, along with your tax return and a payment for as much as you can afford.

If you simply file your return without making the required payments (a practice we don't recommend), the IRS will contact you by mail with a demand for payment within about two weeks after you file. If you still don't have the money, call the IRS at the number listed on the demand to see if it's possible to work out a payment schedule.

Beginning with 1998 returns, taxpayers can use their Mastercard or Visa to pay federal income taxes. However, your card issuer can charge you a service fee of up to 5 percent on top of the amount of the taxes you know. And you will pay interest on the amount you charge until the balance is paid off. As a result, you may be better off working out a payment plan with the IRS, which is limited in the amount of interest it can charge.