We like to do a lot online these days, including ordering food, selling our services, paying our bills, and even checking our mail from our phones and our laptops.
As the government works to catch up with the digital age, we are starting to see the IRS adapt to our methods. Earlier this year, the Internal Revenue Service (IRS) launched IRS.gov, their new website.
And to get right to the point, there are two primary functions we recommend that everyone know how to use at a minimum:
- Paying federal taxes online (and estimated taxes) and
- Downloading your IRS transcripts to ensure income is reported correctly.
The ability to pay taxes online and verify the income that the IRS has on record, makes the tax process easier, but make no mistake, you still need to be careful to pay attention to certain details when using this information, paying your taxes, and accurately reporting your numbers, so proceed with caution and read on.
Paying Your IRS Federal Taxes
Whether you’re calculating your income throughout the year to pay estimated tax before the quarterly deadlines or looking to pay your taxes once your tax return has been successfully filed, you can also pay online, using one of the methods below.
Direct Pay, debit, or credit card
Using the IRS Direct Pay system gives you a secure and free way to pay your owed taxes. You can either pay directly using your checking or savings account or schedule an advance payment process.
If you want to pay with your debit or credit card, you will first need to select a payment processor. This allows you to pay federal taxes online, but you will be charged a varied fee for processing that may or may not be tax deductible.
IRS2Go or E-filing
Using the IRS2Go application allows you to make your payment using Direct Pay with a debit or credit card. It can be downloaded for free from the Apple App Store, Google Play, or even Amazon. The app will also tell you when your return has been received and if you have a refund when you can expect to receive it.
If you are filing your federal tax return electronically, you may choose to file for a scheduled payment with your return. By using the Electronic Funds Withdrawal system, you can pay what you owe directly from your bank account. If you file with a tax professional such as our firm, we’ll ask you your preferred method and if you want to pay your taxes with the filing of your return.
With this method, you have the ability to choose the amount you will be paying and the date you will be doing so, as long as it’s on time. For certain software, you may or may not have to pay a processing fee, and you may also have the choice to pay using a debit or credit card.
You have a couple of other options, as well. You can use the Electronic Federal Tax Payment System (EFTPS) for paying your taxes online. Once you’re registered you are also able to pay by phone by calling 888-555-4477.
Paying by check or with a money order is also an option. You can do so by making your check, cashier’s check, or money order out to the U.S. Treasury. You will need to include your name, address, contact number, and your Social Security or Employer Identification Number located on the front of your choice of payment form. You should always remember to include the tax year and either the tax-related form or the notice number.
If you are unable to pay right away, you have the option to apply for a personal online payment agreement. The installment agreement is set up through direct debit using a direct debit plan to ensure that you don’t have to write and mail a check each month.
Finally, if you are unable to pay because you owe more than you are able to afford, you can try your luck with the Offer in Compromise system. Be aware, however, that not everyone is eligible, so you will have to see if you qualify using the Offer in Compromise Pre-Qualifier.
Paying Your Estimated Quarterly Taxes
Paying estimated taxes online for the simplicity of it, the quickness of the process, and the ease of due process, to be short.
To pay estimated taxes online, you can use the IRS Payments Gateway for any business taxes that will be owed at the end of the year.
Penalties for Late or Unpaid Payments
You must be extremely careful with paying your owed balance or you will face late penalties or penalties for unpaid balances.
Failure to file – you will be penalized if you have not filed your tax return by the due date for returns, or your extended due date.
Failure to pay – when you have not paid the reported taxes listed on your tax return in full by the due date – note that an extension for filing does not extend the time you must pay.
Failure to pay proper estimated tax – when you have not paid enough taxes throughout the year via quarterly estimated tax payments as calculated on your tax return. These penalties are assessed when you file your annual tax return if you fall under 90% of your tax liability.
Dishonored check – when your current bank does not honor your check or any other form of payment that may or may not have been set up by you for the purpose of paying your due balance.
Calculated penalties: what to expect
For a complete list of all the calculated penalties and more information on IRS penalties, you can visit the IRS Common Penalties page.
Downloading Your IRS Transcripts
The IRS’ transcript system is the central database at the IRS that shows what information has been received by the IRS. This includes reports on
- Income: W2’s and 1099-MISC’s filed by employers as well as unemployment and refunds issued by states;
- Deductions: such as mortgage interest, student loans or tuition paid;
- Tax Return Filing: when you filed, what forms, and what your income and tax liability were as reported on those forms; and
- Tax Balances: that is, how much you owed by year, how much you paid, and if there is any outstanding balances.
Why your IRS tax transcript is so important
Downloading your IRS tax transcript is extremely important for many reasons and is very easy to do. The information reflects your overall income profiles and your compliance with your tax obligation. This is what the IRS checks to determine what kind of taxpayer you are.
Keeping a record of your tax returns each year and also have the tax transcript can actually help you prepare for next year’s tax return.
You may also need this information if you are applying for a loan, starting a business, or buying a home. (Pro tip: Some unscrupulous business owners we’ve known have tried to get loans by preparing a second version of their tax return with higher income, while having filed a low-tax version with the IRS to minimize their taxes. Unfortunately for them, they found out that mortgage companies check the transcripts to see what was actually filed, and do not rely on the paper version they provide. Our advice is that if you plan to apply for a loan in the future, let your CPA or tax professional know).
If you are planning on applying for student financial aid, you will most definitely need a copy of your IRS tax transcripts.
It’s also extremely important that you know all of the information on your tax transcripts that the IRS knows, before you file your tax return. A major flag for the Service is when taxpayers underreport income. They don’t care if you overreport (even if it’s $1,000,000 more than they knew about!), however, if you’re short over $100, on income reporting, they’re going to let you know about it.
Knowing which transcript you need
Because there are different types of IRS tax transcripts, you will need to narrow down which one you are looking for before you opt to obtain yours.
A tax return transcript is your summary for a filed tax return, which includes items accompanied with schedules and forms that were previously filed by you. Changes that the IRS or you made after you have filed the original return won’t be reflected.
A tax account transcript is a summary of your marital status, the return type you filed, your adjusted gross income, and your taxable income. If applicable, it will also indicate any changes that the IRS or you made after filing your tax return.
A wage and income transcript shows all the records of income that the IRS has on file for the you and will include any reported W2’s, 1099’s, and 1098’s.
Obtaining your IRS tax transcripts
Getting your IRS tax transcripts is actually very easy to do. You are able to get a copy of them for the current year and up to the past three years.
Because your transcripts are free, you can use the Get Transcript application by verifying your identity and printing out a copy online immediately.
If you need further help, you can check the Fact Sheet for provided details on the process of completing the application process.
You can also opt for your IRS tax transcripts using Get Transcript by Mail or using the IRS2Go app.
Reviewing Before the End of the Year
Finally, no matter which tools you’re using, to effectively use these, you must do some sort of review of your taxes before the end of the year to figure out whether or not you want to go with changing your tax through tax planning or to consult with a tax professional.
While a consultation with a tax professional can cost a few hundred dollars, if you’re on top of your numbers, you can expect to save multiples over your investment if you’ve used these tools correctly. Tax professionals are able to spot certain things you may or may not have missed or had problems with during the process. It is also a good way to get clarity on some gray areas after an initial review and more specific guidance on the overall process of filing and paying.