Zen Penny

Seeking the Path to Financial Nirvana

So You Can’t Pay Your Taxes. Now What?

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You’ve finally done your taxes. Then the cold reality hits you. It’s every taxpayer’s worst nightmare; a massive tax bill that you can’t afford to pay. What do you do now?

Don’t panic. You have options.

The most important thing to keep in mind is that ignoring your taxes won’t make them go away. Make sure to file that tax return on time, regardless of your ability to pay. The penalties for failing to file are far worse than failing to pay your taxes in full.

The IRS offers various installment plans: automatic debits from your bank account, payroll deductions, and regular installments by check or money order. To request approval for a payment plan, you must fill out Form 9465 or use the Online Payment Agreement page on the IRS website. If approved, the IRS charges a one time setup fee on top of the interest and penalties, $103 for regular installment plans and $52 for automatic debit. Also, if you decide to go with a payroll deduction, your employer must complete Form 2159. If you feel like you can’t even make payments at this time, call the IRS at (800) 829-1040. You may be able to arrange a deferment until your financial situation improves.

If you feel you are simply unable to pay your total tax bill and your situation won’t change in the immediate future, you may be eligible to file an Offer in Compromise. An OIC is an arrangement between the taxpayer and the IRS that reduces the amount owed. The IRS obviously considers this a last resort and will not easily approve such an offer until it is absolutely sure that you cannot pay the full tax liability. To apply for an Offer in Compromise, you must file Form 656. Within this form is a worksheet that will calculate the compromise amount. Along with the form, you must pay a percentage of the compromise amount as well as a $150 fee.

You will want to explore other options to pay your tax bill in full before making arrangements with the IRS. While they won’t haul you off to jail, they will slam you with some pretty harsh penalties. In any of the scenarios described above, you will owe interest on your balance, as well as monthly and quarterly penalties, even if you make your payments on time. You may even face a federal tax lien. If you can, borrow from family members, get a cash advance from your credit card or even take out a line of credit to pay your tax bill in full. In most situations, the fees and interest you pay will be much better than an arrangement with the IRS.

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Written by Zenpenny

April 16, 2007 at 7:24 pm

Posted in 2007, taxes

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