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Tax Season 101

How to Cut Your IRS Debt

If you're having trouble paying your taxes or want to fight late fees, these tips can help you negotiate with the IRS.

By Margaret Magnarelli
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Have a big IOU with the IRS? If extenuating circumstances are preventing you from paying your federal tax bill, you might want to reach out to the Internal Revenue Service. Here are three requests you can make.

To Erase Your Late Fees

Try this if: You’re among the estimated 10.4 million or so Americans who didn’t file their returns by the deadline and are therefore on the hook for extra charges (a late-filing penalty of 4.5 percent a month on the balance, plus interest of 3.19 percent a year). People who miss the deadline for a good reason—such as divorce, illness, death of an immediate family member, or natural disaster—may be exempted from those fees if they alert the proper authorities.

What to do: Send a letter via certified mail to the address on the past-due notice you receive from the IRS. Say, “I believe I have reasonable cause for failing to pay my taxes in a timely manner and am requesting abatement of the late-filing and late-payment penalties and interest,” suggests Chicago-based attorney Robert E. McKenzie, whose practice focuses on tax disputes. Then explain why you were late.

To Pay Your Bill Over Time

Try this if: You can’t foot the entire bill by the deadline. It’s fairly easy to set up an installment agreement, which lets you pay what you owe over months or years. The downside? You’ll have to pay a fee of up to $105, plus interest. (The rate is currently 3.19 percent a year, compounded daily; the rate can change quarterly.)

What to do: File your taxes, along with a check for the largest amount you can reasonably afford. Then use the online application (irs.gov/individuals) to set up an installment plan. The IRS will determine your payment amount based on how much you owe and your ability to pay it within six years, says IRS spokesperson Sara Eguren.

To Reduce Your Tab

Try this if: You can’t pay your bill in full within six years.

What to do: Go to irs.gov and download form 656B. Then complete the worksheet (form 433A) to find out the minimum amount you must offer to pay. File and mail both forms to make the proposal official. You’ll also need to pay a portion of your bill, as well as the $150 application fee. Both amounts will be applied to your balance if the IRS rejects your proposal.

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