5 Steps to Consider if You Owe Taxes
04/09/2012 8:00 am EST
Perhaps you were expecting a refund and the numbers didn’t add up. Or you’ve been out of work and are struggling to make ends meet. Whatever the reason, there’s no organization it pays to stay current with more than the IRS, writes MoneyShow’s personal finance expert, Terry Savage.
It’s painful to write a check for the taxes you owe. But it can be even more painful if you don’ t have the cash to pay your taxes this week! Here’s how to scramble to pay your very demanding Uncle Sam.
Even those filing for a tax extension are required to pay the taxes owed now. And if you fail to file and pay, you can face a penalty of 5% of the tax owed for each month, or fraction of a month, that the return is overdue—capped at 25%.
Plus, you’ll owe interest on the taxes that were due—accruing at a rate of 3% compounded daily. But you do have some choices.
Short Term Administrative Extension
If you think you can pay the full amount within the next four months, you can ask the IRS for this extension. But you must be prepared to pay when the 120 days is up.
Fresh Start Relief
This is a new program to help those who have been unemployed. If you are a wage earner who was unemployed at least 30 consecutive days during 2011 or in 2012, or if you were self-employed and had a 25% or greater reduction in business income because of the economy, you may be eligible for the IRS’ “Fresh Start” program.
To request penalty relief, you must file Form 1127A. Your adjusted gross income cannot exceed $200,000 if married and filing jointly, or $100,000 if your filing status is single. The balance due in taxes for 2011 cannot exceed $50,000. And this is relief only from those steep penalties—the interest continues to accrue at 3%.
You can come to a deal with the IRS to accept installment payments—if you have a good filing and payment history over the past five years, and if the amount owed is less than $10,000, and if you can agree to pay it off within three years.
Offer a Compromise
You don’t have to go to war with the IRS to get them to agree to a lower tax payment, but you might want to engage a professional to represent you if you owe a large amount.
Although the idea of paying your taxes through your credit card may be initially enticing, this can be a disastrous step for your personal finances.
You can make credit card payments through some tax software programs or by calling one of the IRS-authorized services at 888-272-9829 or 888 729-1040. The providers will give you immediate confirmation showing the payment has been accepted by the Treasury.
But if you don’t pay off your card balance immediately, interest charges on your outstanding balance might be higher than the IRS interest rate and penalty combined. Plus, the “authorized providers” charge a convenience fee of up to 3.35% for this service, which is likely to offset any mileage or rewards that you get by using your credit card for payment.
One more tip: If you wind up owing taxes this year, contact your employer about withholding more from your paycheck, so you don’t have the same problem next year.
Not having enough money to pay your taxes is an expensive mistake. And that’s The Savage Truth.