Wednesday, March 18, 2009

What if you can't pay the tax man?

Normally 75% of people who file taxes get a rebate. Wow! It's kinda crazy, but I guess most people would rather over pay (a.k.a. give the government an interest free loan) than get hit with an April tax bill. But what about the other 25%? Well, some people actually plan for an April tax bill, instead of giving it interest free, they get it interest free. Maybe. It's more likely that most people don't plan for that bill. And these days many of those people aren't prepared to gingerly hand out extra cash to anyone, especially not the IRS.

So what if you are one of those that owe taxes? What options do you have? Do you dig into your emergency fund? Or put it on a credit card? Delay filing until you have the cash? HOLD IT! Those aren't options.

You're best bet when dealing with the IRS is to give it to them straight. If you can't afford to pay what your owe contact them immediately. File your return by the deadline. If you owe less than $10,000 you can setup installment payments using Form 9465 (the Installment Agreement Request) with your return. On that form, you can suggest your own easy payment plan to the IRS. You'll need pay the amount within 36 months.

Once they receive your proposal you'll get an an approval notice (which should happen within 30 days). They'll charge you a one-time $52 setup fee. You'll also be subject to interest charged on your deferred payments (which is currently 5% annually, subject to quarterly adjustments), plus a "failure to pay" penalty of 0.25% a month. Together, those two charges equate to an 8% annual interest rate on your unpaid tax balance. That might sound like a lot, but compare that to putting the charge on a credit card or tapping your hard earned savings.

If you think that you can just skip paying altogether you should know that you'll incur a 5%-a-month "failure to file" penalty. That continues to accrue until it equals 25% of your unpaid tax balance. So you could end up owing your unpaid bill plus 25%.

If you owe more than $10,000 or need more than 36 months to pay your bill contact the IRS. They are usually willing to work with you, but may need more information about your financial situation.

Dealing with the bill upfront will save you a lot of headache later. But, note that if you should setup payment plans five years in a row, you'll be drawing unwanted IRS attention.

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