What can you do if you cannot afford to pay your taxes
Today is April 15th, also known as the dreaded Tax Day in America. Due to the recession many people may find that they do not have enough money in the bank to pay what they owe. Instead of marching in the various "tea parties" happening today, this is what you can do if you find that you do not have enough money to pay Uncle Sam.
The first thing you should do is to file for an extension with form 4868. Simply filing this form gives you six months of breathing room and extends the deadline to October 15th. If you know that you owe a significant amount of taxes you should also pay what you can at this point because you still have to pay penalties and interest on the amount you owe.
The tax penalty is 0.5% of the amount you owe every month after today if you file your taxes and cannot pay the full amount. Additionally, you have to pay interest with an APR of around 3% on the amount owed. However, if you do not file at all the penalty would be 5% of the amount you owe every month plus interest. The maximum penalty is 25%. Basically, the first thing you should do is to mail in your return or extension request even if you cannot pay the entire amount.
This year, the IRS is supposedly offering leniency to those who are facing financial hardship. However, they will only help if you file a return in time and if you proactively contact them. The IRS has always had an installment plan for paying your taxes, but you need to file Form 9465 to do this or apply online for an installment plan. The installment plan is generally available to those with tax bills less than $25,000 and a good history of past tax payment. There is still a 0.25 percent a month penalty on this plan.
If it is possible for you to borrow money at a rate lower than what the IRS is charging then you should use that to pay off the IRS first. For example, if you have a credit card with a 0% promotional rate you can pay the taxes with it and pay it over the promotional period. There is a transaction fee of 2.49% to put your taxes on a credit card, but if you have a 12 months promotional period at 0% then it is cheaper to owe the credit card company over the period of one year. This is not without risk since credit card companies can change their rates suddenly so you should try to pay it off as soon as possible.
The IRS really hates it when you ignore them so it is urging taxpayers to file their taxes on time and then call 1-800-829-1040 to discuss payment options. If you do not contact the IRS at all then its agents do have many aggressive collection tactics and the power to place liens on your property. So the bottom line is that you should send something to the IRS today regardless of your ability to pay.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.