What If I Can’t Pay My Taxes? at Catch a Gideon

April 17th, 2007 by digerati

If you’ve gone over and over your tax form, you’ve squeezed out all of the deductions that you can, and you still can’t believe the number that showed up on the “Amount You Owe” line, don’t panic. All is not lost. First off, file your return on time. That alone can prevent some penalties. If you don’t have the money to pay your taxes, there may be several options several options.

If you can’t pay the full amount that you now, pay what you can, then pay the rest in a few weeks or months. Paying what you can now will reduce some of the interest and penalties you will have to pay later. In a month or two the IRS will send you an invoice for the remaining amount you owe. Pay it then if you can, otherwise, pay what you can again. The IRS will go through several of these billing cycles before they contact you to create a more formal payment schedule. Hopefully by this time you’ve paid the remainder.

Other options:

You might try borrowing money from a friend or family member. This will avoid the interest associated with another type of loan, or by delaying payment to the IRS. Just make sure you pay the money back as quickly as you can.

Remember that you can pay the IRS and most state’s taxes via a major credit card. This could be an excellent option if you have low or no-interest cards. It may be a worse option that the IRS payment plan if you will be charged a normal (read: very high) interest rate by your card company.

Speaking of letting the IRS finance what you owe, you might consider requesting a formal installment agreement using IRS Form 9465, Installment Agreement Request. You can file this form separately or send it along with your tax return in April. The IRS will generally accept an installment agreement if the amount you owe is less than $25,000 and the balance will be paid within five years. If you owe less than $10,000 and meet other guidelines, the IRS cannot deny your request. They’ll charge you a user fee to obtain the agreement, along with a monthly late-payment penalty of 0.25%.

You can also request a six-month extension of time in which to pay. Keep in mind that you still must file your tax return by the normal April due date. IRS Form 1127, Application for Extension of Time for Payment of Tax, which is used to request the extension, must also be filed by the April tax deadline. The extension will be granted only if payment of your taxes will produce “undue hardship” on you or your family, which you’ll have to prove to the IRS’ satisfaction. You’ll also have to provide statements of income, assets, liabilities, and expenses for three months preceding the filing due date, which is one reason why this method of payment is not strongly recommended.