I got an extension to pay my taxes. Now what do I do? - Part 2

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This is Part 2 of our tax extension article.

If you are one of those U.S. taxpayers who owe money, but can’t pay the whole amount, the IRS has set up an easy payment plan for you.

Approval for the IRS partial-payment plan is not automatic.

Taxpayers who request a partial-payment installment agreement must provide detailed financial information, including data on equity assets, that the IRS will verify. Plus, the IRS will review the arrangement every two years to determine whether the taxpayer's financial status has changed. If it has improved, the amount of installment payments could increase or the agreement could be terminated.

Paying your tax bill over time, even to Uncle Sam, will cost you more. The IRS charges a one-time fee of $105 unless your installment payments are made via direct debit from your bank account.

The fee for direct debit agreements is $52. Some lower-income taxpayers might qualify for a reduced fee of $43. Your first payment will include any fees, and penalties and interest will continue to accrue to your unpaid tax bill. The IRS may also file a federal tax lien against you, which will be released when you pay off your installment loan.

If you want to apply for an installment arrangement, the IRS now accepts online applications.

What if you can't pay off your tax bill, in whole or part, in three or five years or more? Then it may be time to call Monty Hall and make a deal.

The IRS might be willing to accept an offer in compromise; or a lump-sum payment you offer, which is less than the total amount of tax you owe. In these cases, the agency hopes to get some money sooner than it would after years of costly collection efforts.

The key here is that the amount must reasonably reflect your ability to pay. It's not merely haggling to get your tax bill reduced. In fact, the IRS is stepping up its efforts to weed out those taxpayers who use the offer-in-compromise route merely to delay paying their bills.

The IRS will review your financial situation and future income potential to determine whether your offer is appropriate. Be warned, however. Uncle Sam says this program was designed only for extreme cases and very few filers will qualify for the program under the terms they would like. If you believe your situation does indeed meet the requirements, you need to file two forms: Form 656, Offer in Compromise, and Form 433-A, Collection Information Statement.

You must also submit the $150 application fee along with Form 656-A. Low-income filers can request a poverty exception when they file Form 656-A. If you don't send this form along with your fee, the IRS will return your application. If you submit everything as required, and the IRS determines you do not meet the qualifications and rejects your offer, you are out $150. But if the agency accepts your offer, your fee will go toward your new payment amount.

Your offer must include a 20 percent payment for lump sum cash payment offers, or your first installment payment if you're seeking a periodic payment plan.

Regardless of which payment method you choose, make your decision now. Delay will only compound your financial and tax problems. And try to pay something. By sending in any amount when you file your return, at least you'll ultimately reduce your interest and penalty charges.