What If You Can’t Pay the Taxes You Owe?
By Jeremy Vohwinkle, About.com
You have just finished preparing your tax return and notice that you owe Uncle Sam a hefty sum, but you can’t afford to pay it. Are you going to jail? Probably not. The realization that you can’t afford to pay your taxes can make you feel uneasy, but don’t worry, there are some actions you can take to remedy the situation.
Send in Your Return
Even if you don’t have enough money to pay the taxes due, you need to send in your return by the filing deadline. While there is a bit of a penalty for paying late, the penalty for filing late is much more severe. So, no matter what the situation is, file your taxes by the deadline.
Try to Find the Money
Whether you owe $100 or $10,000, the first thing you should do is try to find possible sources to obtain this money. Consider the options available to you such as equity in your home, credit cards, savings, or cashing out paid time off at work. There are a lot of sources of potential money, but some may end up costing even more in additional interest.
If You Just Need a Little Time
While it is best to pay the taxes you owe in full and on time, there are times when all you need is to get your next paycheck or wait a few weeks until the money is available. If you filed your taxes on time, the IRS will send you a letter in the mail stating how much you owe plus any additional interest.
If you know you’ll have the money shortly after the filing deadline it may make sense just to wait until they send you the bill and pay it then, as the interest you pay will be relatively low compared to financing the money with another source. This certainly shouldn’t be a long term solution and your goal should be to pay the IRS as soon as possible.
Consider an Installment Plan
The government, just like anyone else, would rather get the money over a period of time as opposed to not at all, so they do have an installment plan available when you can’t pay in full. To request an installment plan, you should use Form 9465. You can even set this plan up to do a direct debit from a bank account to make the process even easier.
If Even an Installment Plan Won’t Work
So, you can’t find the money and you can’t even get on an installment plan, what are your options? A final option offered by the IRS is called an Offer in Compromise. Keep in mind, this is only for extreme circumstances.
If you request an offer in compromise, you can offer to make either a lump-sum payment or fixed payments over a short period of time. This process requires you submit a complete personal financial statement and an application fee of $150 in addition to Form 656.
These offers are evaluated on a case-by-case basis and you may or may not be approved. If the IRS determines from the information you have provided that you are unable to pay the amount in full, the offer may be accepted. Even if it is accepted, you agree to pay your taxes in full and on time for a period of five years after the offer is established.
Evaluate Your Options Carefully
Paying the taxes you owe is very important, so it is vital that you explore all of your options before jumping to conclusions. Above all, file your return on time to avoid the late filing penalty. Then, take the time to consider how realistic it is for you to pay your taxes and what options are available to you.
Should You Pay Your Taxes With a Credit Card?
By LaToya Irby, About.com
Do you have an income tax bill this year? If you simply can’t afford to pay your tax bill, you have a few options.
* You can pay the IRS late. The monthly late fee is 1% of the balance due, $10 on a $1,000 tax balance.
* You can set up a payment plan with the IRS for a one-time fee of up to $105 plus monthly interest.
* Or, you can pay by credit card. In this case, you’re subject to the terms and conditions of your credit card agreement. Before you use credit to foot your tax bill, make sure you understand the advantages and disadvantages of paying your taxes this way.
The Benefits of Paying Taxes By Credit Card
You can earn rewards when you use a rewards credit card. Take advantage of the rewards your credit card offers by putting your taxes on your credit card. Watch out, some rewards credit cards have restrictions on the type of purchases and minimum charges before they start rewarding you.
You’ll have more time to pay your tax bill without filing extra forms. Putting your taxes on your credit card lets you continue to pay your tax bill beyond the April 15 deadline. The IRS has this option, too, but you have to file additional forms to take advantage of it.
Drawbacks of Paying Taxes By Credit
You’ll pay interest on the tax you owe. The longer you take to pay your credit card balance, the more you’ll end up paying in interest. Using a low-interest rate credit card will reduce the amount of monthly finance charges you owe.
There are convenience fees. When you pay your taxes by credit card, the IRS charges a convenience fee that’s 2.49% of your tax bill. If you owe $1,000 the convenience fee will be close to $25. Putting a $10,000 Tax bill on your credit card will cost $250. Obviously, the more you owe in taxes, the higher your convenience fee will be.
You can’t bankrupt the debt. Income tax is one of the types of debt you can’t bankrupt (along with child support and alimony). So, if you have financial trouble later down the road, be aware that bankruptcy won’t discharge credit card debt incurred from taxes.
Assessing the risks
Paying by credit card may give you the flexibility to pay over a period of time, but should be considered just like any other credit card purchase. Your balance is still subject to your credit card agreement. Interest rate and fees will continue to be dictated by your creditor. Late payments will be included on your credit report, will impact your credit score, and could affect your ability to get credit cards and loans in the future.
Other Ways to Resolve Tax Debt That Could Save You Money
Taxpayers unable to pay all taxes due on the bill are encouraged to pay as much as possible. By paying as much as possible now, the amount of penalties and interest owed will be lessened. They should then immediately call the number or write to the address on the bill they receive, or visit the nearest IRS office to explain their situation.
Based on the circumstances, a taxpayer could qualify for an extension of time to pay. The IRS is willing to offer extensions of time to pay in order to assist in tax debt repayment. A taxpayer can request an extension from 30 – 120 days depending on the specific situation. Penalties and interest incurred will be less through an extension of time to pay rather than seeking to enter into an installment agreement.
If a taxpayer cannot make payment in full upon receipt of the bill, the IRS may request a Collection Information Statement (CIS) to compare individual or business monthly income with expenses and to assist in determining a payment plan.
More ways taxpayers can resolve their debt include:
* Monthly payments through an Installment Agreement,
* Temporary delay or significant hardship consideration, or
* Offer in Compromise
Also consider the following:
* Cash advances on credit cards
* Bank loans
* Liquidating savings accounts, savings bonds, stocks, etc.
* Borrowing against 401(k), life insurance, etc.
* Using equity in real estate or other assets