You’re unemployed, behind on your mortgage, and a guy wearing an Ultimate Fighting Championship T-shirt wants to repossess your car. Could it get any worse? Sure. You could owe money to the IRS.
Even if you don’t have much money, you could owe taxes this year. Some reasons:
- You collected unemployment benefits last year. Unemployment benefits are taxable.
- You took withdrawals from your 401(k) plan or individual retirement account to pay the bills. You’ll have to pay income taxes on the money you took out. You may also have to pay a 10 percent early-withdrawal penalty.
- You worked as a freelancer or consultant. If you didn’t have taxes withheld, you’ll owe income taxes and self-employment taxes on that income.
Even if you can’t pay your tax bill, you should file your return by April 15, says Benson Goldstein, senior manager, taxation for the American Institute of Certified Public Accountants. Filing your return will start the clock on the federal statute of limitations, which gives the IRS 10 years to collect unpaid taxes. If you don’t file, the IRS can pursue you indefinitely, he says.
In addition, you’ll face failure to file and late payment penalties. The total penalty for failing to file and pay your taxes can run as high as 47.5 percent of the amount you owe.
If you’re convinced you won’t be able to come up with the money you owe by April 15, you have options:
- Request an extension to pay. In some cases, the IRS will give taxpayers a short-term extension on the payment deadline. For more information, call the IRS at 800-829-1040.
- Pay by credit card. The IRS, like most major businesses, accepts plastic. You’ll have to pay a “convenience fee” of 2.49 percent of the balance. And if you don’t pay off the balance by your credit card’s due date, you’ll owe interest. For more information about paying by credit card, go to www.officialpayments.com or www.pay1040.com.
- Set up an installment plan with the IRS. This program allows you to pay your tax bill in monthly installments, usually over three years. Applying for an installment plan shows the IRS that you want to make a good faith effort to pay your taxes, says Scott Haislet, a tax attorney and certified public accountant in Lafayette, Calif.
If you owe less than $25,000, you can apply for an installment plan online. Go to www.irs.gov and search for “online payment agreement.”
The IRS charges taxpayers $105 to set up an installment agreement, or $52 if they agree to pay through direct debit.
The IRS will charge you interest on the unpaid balance. However, the IRS interest rate, which is adjusted quarterly, is often lower than credit card interest rates. If you think it will take you several months – or years – to pay your tax debt, an installment plan could be less expensive than paying with a credit card.
In the past, if you missed an installment payment, your entire balance would become due. But in response to the economic downturn, the IRS says it won’t automatically suspend installment plans for taxpayers who miss a payment, or pay a reduced amount. If you’ve already set up an installment plan and are having financial difficulties, contact the IRS.
- Request an offer in compromise. An offer in compromise allows taxpayers to negotiate a reduction in their tax debts. To qualify, you must convince the IRS you’ve exhausted all your financial resources. You’re typically required to give the IRS a detailed accounting of everything you own, along with a rundown of how much money you expect to earn in the next five years.
In addition, taxpayers who make an offer in compromise must give the IRS a nonrefundable deposit of 20 percent of the amount they offer to pay, Benson says. Only about a quarter of taxpayers who apply for an offer succeed in getting their tax debt reduced.
The IRS has historically rejected offers from homeowners, because it assumes they can use a second mortgage to pay their taxes. But the collapse of the real estate market has wiped out many taxpayers’ home equity, leaving them with nothing to borrow against. In light of that development, the IRS says it will give applications from homeowners a second look.
On Saturday, March 21, more than 250 IRS Taxpayer Assistance Centers and 1,000 partner sites will be open from 9 a.m. to 2 p.m. (your local time) to answer questions from taxpayers. The IRS is encouraging taxpayers who can’t pay their taxes to visit one of the assistance centers, which usually aren’t open on Saturdays, and discuss their options.