What if you owe money to the IRS but don't have the cash to pay
the bill? Don't panic -- but don't ignore the problem, either. File
your 2012 tax return (or an extension -- more below) by the April
15, 2013, deadline, even if you can't pay the full amount you owe.
You'll pay a late-payment penalty of 0.5% of the unpaid amount per
month, up to 25% of the balance. But that's a lot better than the
failure-to-file penalty of 5% a month.
To hold down the penalties and interest that will continue to
add up until the balance is paid in full, pay as much of your tax
bill as you can when you file your return. Then wait for the IRS to
send you a bill for the balance. That should take about 45 days and
give you some time to come up with some or all of the remaining
Minimize the damage.
Interest and penalties can add up quickly. Say you owe $9,000 in
taxes on your 2012 return. If you file your return by the April 15
deadline and send no money &emdash; but pay your tax debt in
full three months later &emdash; you'll owe $9,202.50,
including interest and late-payment penalties, according to
estimates calculated by Lisa Greene-Lewis, Lead CPA of the American
Tax and Financial Center at TurboTax.
But if you delay filing your taxes until you come up with the
money, and file and pay your taxes three months after the due date,
your tax bill will balloon to $10,417.50, including interest
(currently 3% on unpaid balances compounded daily) and
failure-to-file penalties, Greene-Lewis says.
Filing an Extension
If you act before April 15, you can file
to delay your tax-filing deadline until October 15. But it won't
delay the deadline for paying your taxes. Interest will continue to
accrue on the unpaid balance. However, the late-payment penalty
does not apply during the six-month extension period if you paid at
least 90% of your actual tax liability before the original April 15
due date and pay the balance when you file the return..
Where to get the money.
If you own a home, consider tapping a home-equity line of credit to
pay your tax bill (assuming you still have equity). You can
probably deduct the interest you pay on the home loan on next
year's tax return.
Paying by credit card is another option, and it could be cheaper
than incurring IRS penalties and daily compounded interest. You'll
owe a convenience fee &emdash; paid to the card issuer, not the
IRS &emdash; of up to 2.35% of the entire transaction, but if
you're enrolled in a rewards program, the tax payments qualify for
points, rewards, airline miles or cash back.
If you can't come up with the cash on your own, contact the IRS
at 800-829-1040 or
to discuss your payment options &emdash; which may include an
extension of up to four months or an installment plan for up to
three years (as long as your tax debt doesn't exceed $50,000).
Don't get suckered by cable TV ads that promise to settle your
tax bill for pennies on the dollar. In extreme cases, you
&emdash; or a tax-resolution company acting on your behalf
&emdash; may be able to file an Offer in Compromise with the
IRS and settle your tax debt for far less than you owe. But only a
small percentage of tax-reduction offers are accepted, and you must
prove that you don't have the means to pay and probably never will,
usually because you're too old, too poor or too sick. If you are
employable and have assets you can sell to raise cash, be prepared
to pay the tax man.