What To Do If You Can't Pay Your Taxes

April 15th is on the horizon, your tax return has been prepared, and you have just learned that you owe the IRS money. Now the panic sets in because you know you don't have that kind of money available to pay the amount you owe. Don't worry, there are steps you can take to help the situation.

Step 1 - Don't Delay, File Your Return

Even though you are unable to pay your taxes, it is important that you file your taxes on time. The IRS warns on its website when filing late or not filing at all, you can increase your tax bill by 25 percent or more when penalties and interest are added in. If you are unable to pay your bill in full, try and pay as much as you can when you file your return. This will help reduce the penalties and interest that will continue to accrue until the balance is paid in full. The IRS will then send you a bill for the balance which will take about 45 days. This may help give you some time to come up with the cash.

Step 2 - Finding the Funds

It is important you consider all the options that are available to you. Can you get a pay advance at work? Do you have a family member who would be willing to lend you the money? Do you have a valuable item that you could possibly sell? Do you own a home? If you do, you could access your home equity line of credit. You could then deduct the interest you pay on next year's taxes. What about using your credit card? You are allowed to use a credit card to pay your taxes if the service provider has been approved by the IRS. Please keep in mind there is a convenience fee of around 2.5 percent of the amount you're paying. For example, if you owe $2,000, the convenience fee will be around $50. And remember, you will incur interest charges on your credit card balance until it is paid off in full.

Step 3 - Other Alternatives

A payment agreement directly with the IRS is also something to consider. If the amount you owe is less than $25,000 and you don't have any other outstanding tax issues, you can file for a short-term extension or installment plan by going online to IRS.gov or by calling 800-829-1040. You can request the short-term extension which will give you an extra 120 days to pay. There is no fee for an extension, but a 0.5 percent penalty and 4 percent per month interest will be added.

However, if more than 120 days are needed, the IRS offers an installment plan. To get started, you will need to submit an Installment Agreement Request using Form 9465. Instructions will be provided with the form. If you can pay the outstanding amount within 12 months and promise to keep current with this year's taxes, almost all requests are approved. There is a $102 fee if your request is approved by the IRS. Normally this fee is deducted from your first monthly payment. You also have the option of setting this monthly payment up on a direct debit from your bank account.

In extreme circumstances, the IRS offers a program called Offer to Compromise. You must submit a copy of Form 656. This process requires you submit a complete personal financial statement and an application fee of $150. The IRS has cautioned that this program is for extreme cases only. It is not designed for everyone with a financial program, nor is it a way to avoid paying taxes.

Communication is Key

The main thing to keep in mind is to show your earnestness in trying to resolve the problem as soon as possible. Keep the lines of communication open and alert the IRS of any changes. And remember, choosing not to file your tax return will only compound your problems.