Monday, April 4, 2011

What Do I Do If I Can't Pay My Taxes?

Exterior of the Internal Revenue Service offic...Image via WikipediaWith tax day only a few weeks away, people are scurrying to get their tax returns done. If your nervous about the whole procedure you're either afraid your not going to make the deadline or you know you owe Uncle Sam money.

If you don't pay by the deadline of April 18th, you could be in store for some tough interest and penalties. The IRS could garnish your wages or your bank account. It also has the power to place a lien on your property, which could ruin your credit rating.

Even if you don't have the money, you should file anyway because failing to file brings with it a penalty of 5% of the unpaid tax for each month the return is late, up to 25% of the amount owed, plus interest. So it's better to file because the IRS will only charge a late fee that is only one-half of 1% a month.

What if I can't file or pay the taxes? Get a short-term extension. If you know you'll have the money in 120 days or less, ask the IRS for a short-term administrative extension. You'll still be liable for the failure-to-pay penalty and interest. You can request a six-month extension by filing IRS Form 4868. Approval is automatic. Filing for an extension doesn't give you more time to pay, so you'll still owe interest and late-payment penalties for every month you're overdue. However, you'll escape the failure-to-file penalty. Include your best estimate of the amount you owe. To request an extension, call 800-829-1040.

I have the tax returns ready, but I don't have the money to pay. Pay with a credit card. The IRS accepts plastic. But unlike most retailers, the IRS won't cover the cost of processing the transaction. You'll have to pay the fee, which ranges from 2.35% to 3.93%, depending on which provider you choose. The fee will be added to your balance.

Is there a way I can make monthly payments to the IRS? The IRS offers a program that allows taxpayers to pay their tax bill in monthly installments. If you owe $10,000 or less and are in good standing with the IRS, approval is automatic. The fee to set up an installment plan is $105, but the IRS will reduce it to $52 if you agree to have payments electronically debited from your bank account. You'll also pay interest, but the rate, which is adjusted quarterly, is considerably lower than the interest on a credit card balance. To request an installment agreement, file IRS Form 9465. In general, the IRS will give you up to five years to pay off your debt. You can choose the amount of your monthly payments. And if you miss a payment, the IRS has the right to demand that you pay the entire balance.

I am so broke, I will never be able to pay my tax bill, What can I do? Under certain circumstances, the IRS will agree to accept less than you owe. The percentage of people that receive this kind of help is very low. You have to convince the government that you don't have the money and that you probably never will. The fee to apply for an offer in compromise is $150, although the IRS will waive it for low-income taxpayers. You'll also be asked to document your assets and liabilities in excruciating detail.

With matters as serious as these, it will not be a bad idea to seek professional tax help. A certified tax accountant will hold your hand through these times and give you the needed guidance.


For a more detailed explanation check out "Losing Sleep Over Owing The IRS?" over at Forbes.com

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