Tax season is almost over, and though you surely do not enjoy going through the process of filing, it's nothing more than a minor inconvenience if you are poised to receive a nice tax refund check. However, if you owe a hefty tax bill and money is running tight, you could be feeling a sense of dread, wondering what you should do if you can't afford to pay on time.
If you run into this problem, it's important that you handle it properly - otherwise, you could find yourself in major trouble with the IRS. Here are five steps you should take:
1. File Your Return
If your tax return is complete and you owe money you can't pay, you still need to submit your return. Failing to file a return on time can result in penalties and additional fees, which just makes a bad situation worse.
If you can't file your return on time, simply file for an extension. You can do so electronically by using tax preparation software, or by completing Form 4868 and mailing it to the IRS. This extends the deadline for filing to October 15, 2014. However, be aware that just because you get an extension to file, it doesn't mean you're off the hook for payment.
2. Pay What You Can
Paying at least a portion of the amount due can certainly benefit you, as it reduces the interest that will accrue on the unpaid balance. You may even choose to pay your taxes with a credit card to avoid paying penalties and interest to the government. For every month your taxes go unpaid (if you file your return on time), the IRS assesses a 0.5% penalty on the unpaid amount not to exceed 25%. However, if you pay with a credit card offering a 0% introductory APR for 18 months, you could divide your tax bill into 18 equal payments to stretch out the amount owed over the life of the promotional period.
3. Apply for a Payment Installment Agreement
To spread out payments to the IRS without using a credit card, you must apply for a payment installment agreement. To qualify for that agreement, the amount you owe - including all taxes, interest, and penalties - must be less than $50,000.
If you owe more than that, you might still be able to use the installment agreement; however, you'll need to complete Form 9465, the Installment Agreement Request, and Form 433F, the Collection Information Statement. Fees for doing so, which range from $43 to $120, depend upon your income and the type of payment agreement you choose (payroll deduction or direct debit).
4. Contact the IRS
You should find out rather quickly whether your application for an installment agreement is accepted. However, if for some reason it is rejected, contact the IRS directly at 1-800-829-1040. There may be other options for you to take advantage of, such as an offer in compromise, which is when the IRS agrees to lower the payment due.
Of course, this won't save you from paying money up front, as there is a non-refundable application fee of $186. You can find out more information on an offer in compromise by downloading Form 656-B. And even if this doesn't work for you, the IRS may be able to consult you regarding other available options.
5. Start Planning Now for Next Year
It is important that you take preventative measures and attempt to reduce your tax burden so you won't have any similar troubles in the future. For instance, you can adjust your federal income tax withholding allowances, and set up a budget for your tax bill well in advance of the payment due date. Adjust your withholdings by filling out a new W-4 (check with your employer's payroll department for the form), and begin diverting funds each month into a savings account so that you'll have enough funds available at tax time.
Before you consider an installment agreement or any of the other repayment programs, review your options to see if you can drum up the cash to pay off your tax bill on time. Can you sell assets? Do you have any friends or family members who would offer you a loan? If so, you may find that it's much easier dealing with someone you know, rather than owing money to the Federal Government.
Have you ever paid your taxes late? How did you remedy the situation?
Kenneth Day resides in South Carolina and writes about money management, taxes, and small business accounting.