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If you have failed to file a tax return but have received a notice assessing a large balance due, your first step should be to file (quickly) your own return with the IRS. When the IRS has not received a return from you but has received documentation from other source reporting various types of income, they will often file a substitute return on your behalf. When they do this, they do not give allowance for any deductions, exclusions or credits for which you may be eligible. Therefore, if you are living and working abroad, you will want to file your own return claiming the Foreign Earned Income Exclusion and/or Foreign Tax Credit for yourself.
If you have prepared and filed your return(s) and have found that you legitimately owe money to the IRS, the next step is to make arrangements to pay the balance. If your payment is past due, you will want to make payment as soon as possible to avoid further penalties and interest. Interest will continue to accrue daily until the balance is paid in full.
The IRS wants your money and will be as flexible as possible in receiving it. The most traditional and straightforward method is to simply mail a check to the IRS. If you do this, please be sure to notate the check with your Social Security number, the tax year for which you are paying and the form associated with the payment (most commonly Form 1040). For foreign income earners living overseas, the unpredictability of snail mail is this option’s major drawback.
Another option is to enroll in the IRS’s Electronic Federal Tax Payment System (EFTPS). This will allow you to pay your tax bill by electronic funds transfer from your bank account. Enrolling is fairly easy, but it does take about two weeks to finalize the enrollment because you must wait for a PIN number to be sent to you via snail mail, which is again a hassle if you are abroad. Once enrolled, though, you can make payments immediately from your bank account, and you have traceability.
If you’d rather pay immediately via credit card, you can opt to use a third-party provider such as Pay1040.com, OfficialPayments.com or PayUSATax.com. Each of these will charge a service fee as a percentage of your payment. Depending on your payment amount, this fee may be lower than the potential penalties and interest you’re facing on your tax bill. Furthermore, many taxpayers enjoy receiving the rewards points associated with their credit cards.
If you believe you can pay your balance within a short time (within three months), contact the IRS directly and discuss your delay. They will likely grant you an additional amount of time to pay the bill. You can either call the IRS directly at 1-800-PAY-1040 (267-941-1000 if you’re overseas) or request the extension via the IRS Online Payment Agreement Application.
If you cannot pay in full right now but would like to set up a payment arrangement (known as an installment agreement with the IRS), you can also do this by calling the number above or accessing the Online Payment Agreement Application. This system is relatively new and allows taxpayers who owe $50,000 or less and are up to date on all of their tax filings to get an immediate response electronically regarding their payment arrangement request. A user fee of $105 (reduced to $52 if you opt for electronic funds transfer from your bank account) applies to new installment agreements.
If you are overwhelmed with your assessed balances and feel that you cannot get your balance settled, you will want to begin the process of requesting an offer in compromise with the IRS. This is an agreement between the taxpayer and the IRS whereby the IRS settles for payment of the taxpayer’s debt for less than the full amount owed. The taxpayer must be able to prove his or her inability to make payments, and the IRS will give a detailed analysis of the taxpayer’s financial situation, both current and projected. The settled balance can either be paid in full or via an installment agreement, as discussed above. Please see the IRS website for more information regarding this option.
If you have failed to file altogether due to an inability to pay US taxes on your foreign income, also have a look at our “Programs For Getting Caught Up” post. If you have any other questions about your tax liability or would like help filing, please contact us.
Use our simple excel calculator to get an estimate of how the foreign earned income exclusion will save you money. It will make your day!