The IRS will make you an offer, and it’s one you shouldn’t refuse.
If you owe taxes, but don’t have the money to pay the bill by tomorrow’s deadline, you’ll find some sympathy at the Internal Revenue Service.
“There’s a big issue this year with people who can’t pay,” said Martin Press, a tax lawyer with Gunster Attorneys in Fort Lauderdale, Fla.
One reason is that the unemployment spike and still struggling economy have resulted in more people pulling money out of Individual Retirement Accounts and 401(k) plans. Now they have to pay taxes and penalties on those funds.
But the IRS will work with you if you’re in that spot. That is, if you take the right steps.
First, file your return.
If you can’t pay your tax bill you’ll face penalties and interest charges. The late payment penalty is one-half of 1 percent of any tax not paid by April 15. That translates to a $25 penalty if you owe $5,000. It is charged each month or part of a month the tax goes unpaid, up to 25 percent, or $1,250 on that $5,000. The interest, currently 4 percent, is compounded daily.
The fine for not filing is 5 percent per month, or $250 for $5,000 due. It’s also capped at 25 percent.
If you don’t have the time to finish your return, file for an extension to avoid the failure to file penalty. If you can pay part of your bill, do so, because the charges only apply on the unpaid balance.
Don’t pay taxes on credit.
The interest rate on your credit card is likely much higher than the 4 percent interest rate the IRS will charge, so it makes more sense to work out a deal with the government than to charge your taxes.
Set up an installment plan.
If you owe less than $25,000, you can request an installment plan online at www.irs.gov. You can also print the form and send in a request by mail.
You’ll get another chance to ask for an installment agreement if you wait for a letter from the IRS seeking your payment.
There’s a $105 fee for setting up the agreement, or $52 if the payments are deducted directly from your bank account. Installment plan payments are based on what you earn, not how much you owe, Press said. The IRS will work with you on a deal that doesn’t bust your budget.
Seek professional guidance.
The IRS also offers to settle tax debts for less than what’s owed in certain situations. Press said taxpayers should avoid these deals, called “offers in compromise,” until they’ve discussed them with a tax professional. One drawback is that they can extend the 10 years the IRS has to collect any taxes due by however long the agency spends reviewing the offer.
Source: The Associated Press.