THE BLOG
03/29/2013 10:38 am ET | Updated May 29, 2013

Everything You Need to Know If You Owe the IRS

By now you've heard me say that 75 percent of all taxpayers receive a refund (according to public IRS data, it's even higher this year), so what happens if you are in the other 25 percent and owe? There are many ways to pay your balance due between now and April 15, starting with the various options to pay it outright. But for those who can't (and don't worry you're not alone), the IRS offers payment options. Here's what's offered.

You can use the old-fashioned method and mail a check or money order. However, this is the least secure payment method since the check has to get to the IRS and will be handled by individuals at the payment-processing center. You could have a key punch error or other typo, or your check could get dropped, lost, or stolen from the mailbox. When there's payment involved, you generally want the most direct, secure channel possible, but, at the end of the day, mail is a valid option for paying the IRS. If you're mailing a check, follow these two steps:

  1. Mail the check or money order with Form 1040-V, "Payment Voucher," to the mailing address for your state as listed in the IRS form instructions.
  2. Make sure the check or money order is payable to the "United States Treasury" and you put the form number, year and primary social security number in the memo section of the check. For example, when paying for this year enter "Form 1040, 2012, XXX-XX-XXXX" in the memo section of the check. The memo section is usually located on the bottom left of the check. If you are using a money order, write the form number, year and primary Social Security number in the bottom corner of the money order. Consider making a copy of the check or money order for your files.

A safer, more secure, payment method is to authorize an electronic funds transfer directly from your bank account. This method can be done for Form 1040 payments when your tax return is electronically filed. You will select a payment date and provide the Treasury with the bank name, routing number and the account number of the account you wish to have debited. You will see "IRS USA Tax Payment," "IRS USA Tax Pymt," or something similar on your account statement once the payment is made. Payment information will only be used for the tax payment(s) authorized and will not be disclosed for any reason other than for processing the payment.

The third free option is the Electronic Federal Tax Payment System (EFTPS). This is a payment account for all types of taxes that uses a secure government website. The service is convenient, accurate and can be accessed online 24/7. Once you're enrolled, you can make any type of federal tax payments online. The system allows you to schedule individual tax payments up to 365 days in advance and business tax payments up to 180 days in advance. It's free, easy to use and always available once you set up the account. EFTPS works really well if you make estimated payments or have multiple types of federal taxes because it allows you to decide when you will pay your taxes after your tax return is filed.

You can set up an EFTPS account at www.EFTPS.gov or by calling IRS EFTPS Customer Service at 1-800-555-4477. Once the EFTPS account is set up, you will have access at any time for any type of tax payment.

If none of these options work for you, you can always pay with a credit card, but you will have to pay some fees.

You can pay by credit or debit card through a third-party payment processor. The IRS does not pay the card fees like merchants do, so you are responsible for paying the card fees in addition to the tax fees. Fees can range from $2.99 to $3.95 for a debit card payment to 1.8 - 2.35 percent for credit card payments. You'll want to check with your credit card company. All credit and debit card transactions for tax payments are handled by service providers under contract to the IRS.

If you cannot pay in full through any of the above options, the IRS suggests you exhaust options outside of the IRS and Treasury department first such as a personal loan, borrowing from a family member, or using a credit card to pay your tax bill. The IRS charges penalties and interest -- with the interest compounded at a faster rate than banks -- making your final bill much higher with IRS than a conventional lender.

If you are unable to secure funds through other means, the IRS offers a Payment Plan. The IRS payment plan has a fee of $105 to set up. You can lower the fee to $52 with a direct debit agreement. If your income is below a certain level, you may qualify for a reduced payment plan fee of $43. This is a one-time only fee and is not part of your payments. You must owe less than $50,000, be able to pay your balance in full within 72 months and make a minimum $25 a month payment to be eligible for the IRS payment plan.

To get started, complete Form 9465, "Installment Agreement Request," and either mail or e-file the application. This can be done when you submit your tax return. When you enter into an installment agreement, make sure you pay as much as you can when you file your tax return, continue to pay as much as you can, but be sure to not default on the plan. Contact the IRS if at any time you are unable to make your monthly payment. If you default on the plan, the IRS will demand payment in full and can send your account to collection if you don't pay. You can generally reinstate the payment plan but the IRS will assess another set-up fee.

If you are in an installment plan, the IRS will hold any future refunds and apply them to the tax debt until the debt is paid off. For more information on payment plans visit IRS.gov.

While the majority of taxpayers enjoy a nice refund, not everyone does. Whether you are going to file before April 15 or file for an extension, if you owe, be sure to take care of that balance. Failure to pay a balance due or establish an approved IRS payment plan will result in penalties and interest and likely cost you much more money in the long run than if you worked to find other options at the front end. The IRS is good at many things including, tax law administration, taxpayer service and support, and technology tools and innovation. However, the task that IRS is simply the best at is ultimately getting all the money that is due to them. Be sure you pay what you owe, when you owe and all that you owe on time -- it will save you time and money in the end.