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Payment deadlines: Interest on tax owed
To avoid both interest and late payment penalties, ensure your payment of any tax owed is made by April 15. If you reside abroad, the IRS allows you to pay by June 15 and avoid late penalties, but you will still accrue interest from April 15 until the payment date. To avoid interest charges, it is crucial to prepare or estimate your taxes before April 15.
Note: TFX does not calculate interest and penalties, as payment dates vary. The IRS determines these based on payment timing. If we do not know the date the client pays, then we either overstate (payment date too late) or understate (payment date too early; IRS sends another bill) penalties.
TFX can prepare drafts for estimated tax payments
Many clients living in low-tax countries earn above the Foreign Earned Income Exclusion and are required to make estimated tax payments to the IRS. Often, these clients do not have all the necessary figures available early in the year.
If you need to calculate your estimated tax payments but won't have the final figures until later in the year, we can prepare a draft of the return based on the preliminary (estimated) figures from the Tax Questionnaire that you complete. You will use this draft to make estimated payments. Later in the year, when the final figures become available, we will update the return draft and file it with the IRS.
What to do if you owe an estimated tax
If you did not owe any tax last year:
You do not need to make estimated tax payments before April 15. If you anticipate owing tax this year, submit your documents as early as possible to prepare your return before April 15 to avoid interest accrual.
If you owed U.S. federal tax last year and did not anticipate tax withholding through an employer:
You should make quarterly payments on your estimated taxes for the coming year, assuming a 10% income increase.
If you failed to make estimated payments or if you paid too little:
You can eliminate the most significant part of the estimated payment penalties by filing a preliminary draft of your tax return early, based on the highest amount of tax you may owe, and paying the total amount no later than Jan. 31. You can later file an amended return with the exact numbers and receive a refund if you have overpaid.
If you file by Jan. 31:
You will still owe a penalty for failure to pay your estimated tax payments on time, but it will be relatively small (approximately $20 for every $1,000 that was not paid on time).
Why you should pay 110% of the previous year's tax owed by Jan. 31
Estimated tax payments are calculated using several formulas projecting the coming year's tax. The default formula calculates 110% of the previous year's tax owed. For example, if the amount you owed in 2023 was $1,800, we would prepare estimated tax payment vouchers for $2,000 in 2024 (4 quarterly payments of $500), representing roughly 110% of what you owed in taxes for 2023.
However, your actual tax liability can vary, especially considering factors like passive investment losses. In general, it is advisable to avoid penalties for underpayment of tax. If you have already made 3 out of 4 estimated payments and your income is expected to be significantly lower due to the stock downturn, you may consider abstaining from the final payment. However, to determine the precise amount, we need to prepare your tax return. Once we do it, any overpayment will be refunded to you.
Note: this rule applies to all U.S. taxpayers and is not dependent on expat status.
Options available when unable to pay the full tax amount
If you find yourself unable to pay the full amount of tax that you owe, you have two options:
Request a payment agreement online through the IRS website if you owe $50,000 or less in combined tax, penalties, and interest and have filed all required returns.
If online qualification is not met, we can file an installment agreement request for you. The installment agreement must be prepared for the full amount owed to the IRS, including penalties and interest.
Note: regardless of which option you choose, you should pay as much as you can when you submit your tax return and then wait for the IRS to send you a bill for the unpaid balance plus penalties and interest.
How to make payments using IRS Direct pay
When making payments to the IRS using IRS Direct Pay, you will need to confirm your identity. Follow these steps to make a payment for your recently filed original return or for a balance due on a notice, including any interest and penalties:
Go to the IRS website and click Make a Payment.
Click Bank Account (Direct Pay) > Make a Payment.
Select Balance Due under Reason for Payment, Income Tax - Form 1040 under Apply Payment To, and the Tax Period for Payment.
Click Continue.
On the Verify Identity page fill out the fields with an asterisk (*):
Tax Year for Verification: Select a year prior to the tax year you are making a payment for (e.g., if paying for 2024, enter 2023, 2022, or 2020).
Filing Status: Select the same filing status you had in the referenced year (e.g., Single).
First Name: Enter your first name as indicated in the 'Your first name and middle initial' box on the federal return (e.g., Mary J, or Ma Andrea).
Last Name: Enter your last name as indicated in the 'Last name' box on the federal return referenced.
SSN or ITIN: Enter your Social Security number or ITIN without dashes or spaces (e.g., 111223333).
Street Address: Enter your home address as indicated in the 'Home address (number and street)' box on the federal return referenced. If there are dashes or commas, replace them with spaces.
How to make estimated payments using IRS Direct pay
To make estimated tax payments in advance of the timely filing of your return, follow these steps:
Go to the IRS website and click Make a Payment.
Click Bank Account (Direct Pay) > Make a Payment.
Select Estimated Tax under Reason for Payment, 1040ES (for 1040, 1040A, 1040EZ) under Apply Payment To. The Tax Period for Payment will be automatically prefilled.
Click Continue.
Verify your identity on the Verify Identity page as described above.
Notes:
Estimated payments are accepted until Jan. 31 of the year for which they are made. Unlike payment towards a prior tax year, estimated payments are for the future, so you are likely paying toward the current year.
If making a late estimated tax payment (unpaid vouchers) after Jan. 31 for the last year, select Balance Due as the reason for payment and choose the correct year.
To avoid underpayment penalties, consider making estimated payments of 110% of your prior year's tax due.
Other IRS payment options for U.S. residents and overseas
For quick and easy payments, consider using electronic payment options:
Electronic Federal Tax Payment System (EFTPS): Pay safely individual and business taxes online via this free service or by phone at +1 (800) 555-3453 (toll-free).
Note: all business tax payments should be made through the EFTPS.
Credit or debit card: Both paper and electronic filers can pay taxes online through authorized processors. Though the IRS does not charge a fee for this service, the card processors do. For taxpayers who itemize their deductions, these convenience fees can be claimed on Schedule A.
Check or money order: Make payable to the U.S. Treasury and write “2024 Form 1040,” name, address, daytime phone number, and Social Security number on the front of the check or money order. To help ensure that the payment is credited promptly, enclose a Form 1040-V payment voucher.
For more information on IRS tax payments, refer to Form 1040-V: Payment Voucher: Who Can File It & How to File It with the IRS?
IRS fee notice: Payment voucher was not provided by a previous tax preparer
Receiving an IRS fee notice can be unsettling, but it is important to note the following:
Estimated payments responsibility: If you owe over $1,000 in taxes for a specific year, the IRS mandates making estimated tax payments throughout the following year to avoid penalties. Refer to the IRS article on Estimated tax requirements for small businesses and self-employed.
The role of a previous tax preparer: The responsibility to provide IRS payment vouchers for estimated tax payments rests with your previous year's tax preparer. We assume that whoever prepared your tax return before us handled this correctly unless you explicitly request our assistance.
If you plan to use TFX's services for your next year's tax return but your previous year's CPA did not provide the payment vouchers, here is how we can help:
Tax Projection service: TFX can prepare a tax return projection based on your current income and potential income changes. We will provide estimated tax payment vouchers to fulfill your IRS obligations before Jan. 31 of the following calendar year.
Seamless adjustment of the draft return: When you are ready to file your tax return, we will adjust the preliminary draft using actual figures. Upon adjustment, you may either owe more or qualify for a refund. If the difference between the estimated and actual amount owed is under $1,000, you won't face any penalties.
Note: the tax projection service requires a retainer, with credit remaining to finalize your return.