Will they throw me in prison?

February 29, 2012 4:33 PM

I am way short on my estimated quarterly federal taxes this year, am freaking out, and need some honest insight into how much trouble I am in.

I made a miscalculation where I paid a good deal of my income towards some credit card debt, thinking I could catch up on my federal taxes later. However, I was not able to.

My estimated state taxes have been paid in full, and I have sent $3600 to the Feds, but I am still $6000 behind.

I am embarrassed by this, and really stressed out. Here are my questions:

What happens in situations like this?

Will the IRS let me make payments to "catch up?"

If so, generally how bad is the interest on this debt I owe the IRS?

How long do they give to pay it back?

Thanks so much for any help and insight you can provide.

posted by 4ster to Work & Money (24 answers total)

I am absolutely NAA or am I YA, but I've been self-employed for many years, paying the ES 1/4ly tax. Its my laypersons understanding that the requirement is that you pay, not that you are magically correct. that is what your tax return is for. you are going to owe taxes this year, which is a drag, but if you made your 4 1/4ly payments in good faith, I really dont think you'll face any penalties or fines...

if the amount you owe is too much to pay at once, you can set up a payment plan. there is a surcharge but its not that much, and faaaaaar cheaper than getting into IRS trouble.

get an accountant. you should be able to get competant tax return help for about $150-200, which is deductible :)
posted by supermedusa at 4:38 PM on February 29, 2012

Take a deep breath. The IRS wants their money from people, and that means they are willing to work with people to set up payments. Contact the IRS and let them know you need to set up payments to pay them back. Whatever you do, don't try to hide it or get away with it. Just be up front and let them know you want to pay it back, but paying back the full amount isn't possible for you right now.

Best of luck to you! And not to sound flip, but there are many posts about cheap/free things to do, cheap eats, and inexpensive hobbies while you budget in your monthly payments.
posted by shortyJBot at 4:39 PM on February 29, 2012 [2 favorites]

IRS interest is not terrible at all. If you pay your balance in full by April 15th, they may not even assess you any interest on the late quarterlies.
posted by Sidhedevil at 4:40 PM on February 29, 2012

After reading supermedusa's comment and re-reading how (understandably) nervous you are about this, an accountant might be a good idea for you to help with the process.
posted by shortyJBot at 4:41 PM on February 29, 2012

I had to do this back in 1998, and again in 1999. It was far less trouble than I expected. I simply sent a letter to the IRS with my tax return explaining that I was broke and asking them to set up a payment plan. They sent back a statement laying out a schedule of payments. I don't remember exactly what the interest rate was but it was not onerous.
posted by Mars Saxman at 4:42 PM on February 29, 2012

Response by poster: Thanks for the input so far. I have an accountant who does my taxes for me. Also, FWIW, there is no way I'm coming up with the balance due by April 15.
posted by 4ster at 4:42 PM on February 29, 2012 [1 favorite]

Relax. Talk to the IRS and they'll help you out. You are not in trouble!
posted by amcm at 4:42 PM on February 29, 2012

Yes, the IRS has payment plans. We've had two, one of them was for about $6K, interest was like 4%, we paid I think well under $200/month for years. It's a drag, but you aren't in any trouble.
posted by Lyn Never at 4:43 PM on February 29, 2012 [1 favorite]

Response by poster: Lyn Never: did they set up the monthly payment amount, or did you?
posted by 4ster at 4:46 PM on February 29, 2012

Don't panic, the IRS is actually nice for every encounter short of an audit (and even then, it depends on the auditor.) If it makes you feel better, you are VASTLY better off paying the IRS interest rate of a flat 4% than you are paying the credit card companies at 15% or higher. You can send them a proposal, saying you've paid 3600 of the 9K balance and propose paying the remaining 6K in 25 payments of $250 per month plus interest. They'll write you back and either say yes or make a counter-proposal for 12 months.
posted by DarlingBri at 4:56 PM on February 29, 2012 [3 favorites]

I think you did the correct thing. Your cc debt is at a much higher rate than your Uncle's. Sam charges reasonable rates compared to Jamie Dimon. Play nice and play honest and you not only have nothing to worry about, you will sleep well knowing you made a sound financial decision (as long as you don't run up the cc debt again).
posted by JohnnyGunn at 5:08 PM on February 29, 2012

Government tax extractors aren't as menacing as many people make them out to be.

Here in Canada, I didn't realize that I should have switched from annual to quarterly payments for the GST last year until October. I had missed three payment deadlines for a pretty substantial amount of money. The CRA reps I talked to were very patient and helpful when I was thisclose to freaking out completely. I ended up paying the amount owing several months late (which means I racked up some interest), but I wasn't audited, harassed, jailed or pointed at and mocked on the street.

Talk to the IRS. You'll be fine.
posted by maudlin at 5:08 PM on February 29, 2012

When I've done payment plans, I've suggested the payments and they've always accepted them. Be conservative in your suggestion, because defaulting on a payment plan looks worse than setting up a longer-range payment plan. The interest is really not terrible at all; it's the penalties that are severe, so do whatever you can to ensure that you won't incure penalties.
posted by Sidhedevil at 5:14 PM on February 29, 2012

I screwed up similarly once. I was assessed a penalty fee for underpayment that in the grand scheme of things was extremely small. As long as they get the money in the end, they're happy and you're not in any trouble.
posted by Devoidoid at 5:14 PM on February 29, 2012

According to my husband, he chose a timeframe. Like he could have chosen 6 months or a year or whatever, he clearly chose several years. He thinks maybe the interest rate was a teensy bit better the faster you did it. So it basically works like financing.
posted by Lyn Never at 5:17 PM on February 29, 2012

I don't think you have anything to worry about. I've set up payment plans with them a few times and both interest and penalties weren't very high, and they were very polite and helpful. Just talk to them and tell them how much you can comfortably pay per month, they'll either agree (most likely) or ask you if you can pay a bit more.
posted by rainy at 6:07 PM on February 29, 2012

Oh, and I once defaulted on monthly payment due to not reading their letter carefully enough and their 'include check with this letter' looking almost identical to their 'your checking will be automatically charged at the end of month' statement. At first I got a scary automatic letter telling me that I'm very naughty for having done so, but a quick call straightened things out and they simply reinstated the installment plan.
posted by rainy at 6:12 PM on February 29, 2012

You don't even have to talk to them to set up a payment plan. Start here and apply online. It walks you through it, and you even get to pick how much you can pay a month. It's pretty no-stress.

Be aware that if you're on a payment plan, any future tax refunds are applied to the balance until it's paid off. (Common sense, but I know at least one person who was Totally! Shocked!)
posted by MeghanC at 7:14 PM on February 29, 2012

Don't freak out. It's easier and cheaper than being late on a cc bill. They are very pleasant and helpful to talk to. (actually some of the nicest and most helpful CSRs I have ever spoken with)
posted by Vaike at 7:35 PM on February 29, 2012

but if you made your 4 1/4ly payments in good faith, I really dont think you'll face any penalties or fines...

Kinda, but good faith means paying about what you owed last year in this case. IRS says: "Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller."
posted by smackfu at 7:38 PM on February 29, 2012

Underpaying estimated is not a huge deal. The penalty is not that big and although you probably don't want to, you can always pay your taxes with a credit card if you have to. Sure you get the convenience fee assessment of 2.X% but if it eases your mind to pay up vs. start up a payment plan then that's always an option.
posted by thorny at 12:21 AM on March 1, 2012

Oh my god, you are totally fine. Please stop freaking out.

They don't like, take out a lien or anything for years and years. There will be interest applied, until you pay, and you will get a lot of mail from them, but that is nothing. Please please please know that the IRS just wants to talk to you; they just want to know what's going on. Later, when you talk to them, you're just like "Okay, it's like this: I paid off all my credit card debt, and I forecast that I could pay my federal taxes, and I messed up and had a shortfall, doh!" They will like, LAUGH, and be like "well good for you, those credit cards are crazy." Swear to God: take it from someone who had his own IRS case manager and seven long years of IRS chaos, you are totally legit.

I would, however, be careful about setting up a payment plan without discussing it with a professional first. Payments in compromise and payment plans have conditions, interest rates and penalties attached.

I am NOT at all your accountant and you should not do any of the things I did to learn about the wonderful ways of the IRS.
posted by RJ Reynolds at 5:05 AM on March 1, 2012

Also, echoing DarlingBri: get them on the phone. Any time I've had to call the IRS with a question or problem, they have been exceedingly helpful and very nice. Don't panic!
posted by mimi at 6:09 AM on March 1, 2012

I actually did my taxes this past weekend and realized I had miscalculated and underpaid the estimated quarterly payments. The interest is 4% for the first two payments, 3% for the second two payments, charged from the time each payment was due. Although that is only for when you are able to pay by April 15th, so it may be a little different for you. But even so, I think the 3-4% rate shows how different this is from other kinds of debt. While credit card companies want every penny they can squeeze from you, the IRS really just wants the full value of they're supposed to collect. They are not looking to punish you.
posted by parallellines at 2:07 PM on March 1, 2012