Stephen Fletcher, CFP®, MBA, Wealth Advisor at BlueSky explains the many payment options that are available to the IRS.
Tax season. For many people, it is a stressful time of the year. Pulling together all of the tax information, sending it to a preparer, getting it back in time, checking numbers for accuracy and making any necessary payments before the deadline can feel like a Herculean task. While we can’t promise to make this whole process simpler through this blog post, we can at least help you streamline the processing of your tax payments.
Failure to pay can result in a maximum penalty of 25% of your amount due, and it can be caused by 1) not making payment before the deadline 2) a timely payment that is unsuccessfully completed (check never arrives, incorrect information on an electronic processing form, etc.), or 3) the IRS incorrectly applies your payment to your tax record. While this can be corrected, it is very time consuming and difficult; the IRS handles disputes with taxpayers from the standpoint that the IRS is correct, and the taxpayer must prove that the IRS is in error. Without accurate record keeping, it can be almost impossible to have some of these penalties reversed.
Below are the different payment options allowed by the IRS. We will outline how each process works, as well as list the pros and cons of using each.
Some CPAs still use paper checks. The tax returns are mailed to clients, payment is requested to be made via tax voucher and paper check which is then mailed to one of the IRS’s many mailing addresses. However, this process can create unfortunate issues; trying to find the correct mailing address to use; paper checks lost in the mail, checks arriving but not having the correct or full information in the memo line, or the check is missing the corresponding voucher. The best way to ensure your paper check is received and applied is to send it via certified mail which requires the IRS to send a slip back to you confirming that they have received your check. It is also imperative that you fill out the memo line correctly with the tax form you are submitting (1040), the tax year and your social security number.
- Check needs only to be mailed by or on April 15th
- Is as simple as writing a check and enclosing the provided voucher from your preparer
- IRS has several mailing addresses, and your check can be misdirected if you use the wrong one
- Mail could get lost
- Even with a correctly completed voucher and check, the payment could be applied to the incorrect tax year due to human error
IRS Direct Pay
The IRS website has a page that allows you to process your payments directly from your checking or savings account. This system increases the likelihood of your payment being properly applied by removing the middle man and allowing you to directly access your IRS record and make a payment for the selected tax year and form. There is a simple identity verification process that involves your name, date of birth, social security number and address from a previous filing year. The process takes less than 5 minutes from start to finish, and allows payments to be submitted the same day.
- Simple and fast
- Increases accuracy and likelihood of your payment being properly applied
- For tax payers who are not technologically adept, incorrectly entering bank information could result in the payment not being processed
*Note: many states are also rolling out similar systems to pay amounts due
Debit or Credit Card
This process is very similar to the Direct Pay, but is generally used by a third party (your tax preparer, for example), and it carries with it a processing fee which can be anything from a few dollars to a percentage of your amount due. Given the similarities to Direct Pay, this way of processing payments is not recommended.
Electronic Federal Tax Payment System (EFTPS)
EFTPS is another system the IRS offers that allows taxpayers to create an account, store bank information, and quickly and simply process a payment. Similar to Direct Pay, it removes the need to verify your identity by replacing that with a username, password and PIN, and stores you bank information to reduce routing or bank account number errors. This system, however, takes time to set up (you should allow up to 4 weeks to receive your PIN in the mail), so it should be in place well before the tax deadline.
- Stores your information to reduce the potential for errors in entering numbers
- Takes 4 weeks to receive your PIN
- Only offered by the IRS
*Note: some other states have offered a similar payment process, most notably California, but it is not a wide offering as of now.
E-file and Pay
This process is completed by your tax preparer; you simply provide them with your bank account information and they include it when processing your tax returns. They do a similar but slightly different operation when they are submitting tax returns that have a refund due. However, with payments due, there is more liability for the preparer if the information is incorrect, so only a few offer this. If you have a CPA you trust, this is the simplest process as the filer, but it is not a widely-offered option.
- Simplest process for the taxpayer
- Not offered by very many CPAs due to the liability
- Not used by many CPAs, so the possibility of error exists even if a preparer agrees to process the payment with the e-file
It is important to process your tax payments in the way that makes you most comfortable. If you still like writing checks, write away! Just remember to ALWAYS, regardless of the processing system, double and triple check every submission and make sure you’re on time!
If you have any questions, would like more information, or would like a step-by-step guide on how to submit payments using IRS Direct Pay and your state’s website, please contact your BlueSky team.