It’s bad enough finding out that instead of enjoying a fat tax refund this year, you actually owe Uncle Sam. And on top of that bad news, you don’t have the money.
What can you do? Lots — just don’t ignore the tax bill. Racking up fees and penalties over time only makes it worse.
Do this instead: File on time and choose one of the following options:
Depending on the size of the tax bill, it might make sense to take out a loan (if you qualify) or pay the tax bill via credit card. You’ll have to estimate when you can expect to pay the bill, and do a cost-benefit analysis on whether the credit card or loan interest is greater than the potential penalties that you would pay the IRS for a delayed or partial payment. Don’t forget to include the fees associated with paying taxes by credit card with an approved vendor (generally from 1.87% to 2.25% of the total tax bill).
- Apply for A Short Extension
You can fill out the Online Payment Agreement application on the IRS website to stretch out your debt repayment over 60 to 120 days, or you can call the IRS directly to make the same request. By contacting the IRS, setting up the extension, and paying what you can before the deadline, you minimize the penalties and interest that you owe.Before making the final payment, contact the IRS to verify the correct amount of accrued interest, especially if you are paying before the end of the extension. Do NOT wait on a bill from the IRS.
- Request Installment Payment
If you need more than 120 days to pay your bill, consider using IRS Form 9465, “Installment Agreement Request” to set up a payment plan. There will be a fee to set up the plan and after that point you will pay the bill in monthly increments that you set up — assuming the IRS approves your plan. Your payment plan must not stretch out the payments for more than three years. File Form 9465 as early as possible because it may take up to thirty days for the IRS to let you know if it has been approved.
- Ask For a Hardship Extension
If you qualify for an extension due to financial hardship, you can file Form 1127 with the IRS before the filing deadline to claim an extension of up to six months. Hardship cases require showing a substantial financial loss if the tax is paid on time (for example, having to sell property at a sacrificial loss). A prolonged period of unemployment may qualify.The IRS does not consider a mere inconvenience worthy of a hardship, and you will have to explain why borrowing the money is not a viable option for you. You must supply a statement of assets and liabilities at the end of the previous month prior to filing the form, and list all income and expenses for the prior three months. If you have enough advance warning, we suggest contacting the IRS first to see if you are likely to qualify for a hardship situation.
TIP: Your best bet to limit the damage is to contact the IRS before the filing date and pay whatever you can at the regular filing deadline to minimize the damage.
Investigate the options above to see which one best fits your situation, and do not ignore the problem. Do not expect the IRS to just go away and leave you alone. It. Won’t. Happen.
Originally Posted at: http://www.moneytips.com/you-owe-taxes-but-cant-pay-the-bill