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Help, I Can’t Pay My Taxes!

How To

photo: brianjmatis

Waiting to file your taxes because you can’t pay the bill? If you owe the IRS money, you are actually part of the minority: according to the IRS, nearly three-quarters of taxpayers received refunds in the past two years.

But don’t panic. “The world isn’t ending because you owe taxes,” says Jim Sharvin, a CPA in Torrance, Calif. In fact, the IRS would loan you the money to cover your tax bill, he says. “It’s your instant loan approval company.”


But before you think about payment plans or loans from any other source, focus on filing on time. Failure to file your tax return or file for a six-month extension can cost you a penalty of 5% per month up to the first five months.

For example, if you owe $2,000 and you’re a month late, you just cost yourself $100. That’s equivalent to a 60% annual interest rate! And that’s without the additional government interest rate, currently at 4% plus the .5% failure to pay fee that both start accruing on tax filing day, which this year is April 18th.

There are limited exemptions, such as active duty military if serving overseas, certain natural disasters or medical conditions. If you have an extreme circumstance for not filing on-time, contact the IRS to appeal late fees.

Payment Plans

Once you’ve completed your tax return and know what you owe, it’s time to consider payment options. The easiest, of course, is to dip into any savings you have set aside (ideally, for that specific purpose). If you don’t have all of the money saved up, consider paying at least a portion on what you owe.

“You may think you owe $2,000 and think ‘I can’t afford to pay $2,000,’” says Sharvin. But paying $200, $400 or $500 will save you interest and failure to pay penalties on that portion of what you owe to the IRS.  With a $200 initial payment, you’ve reduced your debt to $1,800.

If you pay off your balance within 90 days, you can send in the money as you can to the IRS. As long as you filed on time, the only additional charges you are responsible for is the .5% failure to pay fee per month plus the interest rate, beginning on April 18th.

So let’s say you filed your taxes on Feb. 18th and you found out you owe $2,000. You send in $200 right away. Then you make a payment on March 18th of $600. On April 18th, you send in a payment of $600 again. You send in your last payment of $600 on May 18th. With an annual interest rate of 4% plus your .5% failure to pay penalty, you now owe $2.28 in interest and penalties. However, if you started making the same three payments on May 18th after sending in an initial $200 payment, you’d owe around $14 in interest and penalties.

If you don’t have liquid funds available within 90 days of filing and you owe less than $10,000, Sharvin says, your best borrowing option is an IRS payment plan. There’s currently a fee of $39 to begin. Simply go to and fill out an online form with what you can afford to pay. Generally, the IRS wants you to pay off your loan within three years.  So if you owe $1,800, you could set up your payment plan for 36 equal payments of $50 plus interest and penalties. The good news is, once your payment plan starts, your failure to pay penalty drops by half.

You may be tempted to use other financing options, such as your home equity line of credit, family loan, or even a credit card. The last option, in particular, is especially risky. According to Sharvin, online services charge convenience fees of up to 5% of each payment if you’re paying via credit card.  Home equity lines of credit may be cheaper than a loan from the IRS, but you’re putting your home in jeopardy for money the IRS is automatically willing to loan.

If you owe more than $10,000 and you don’t have the cash to pay it off, even with a payment plan, talk to an attorney or CPA about settling your IRS debt, Sharvin says.

A Penny Learned is Two Pennies Saved

Avoid fees next year by using the IRS withholding calculator to adjust your withholdings allowances everytime you have a life event that changes your taxes. Such events include beginning to make payments on your student loans, marriage, divorce, birth of a child or a huge investment loss or gain. And if you’re not sure how to change your withholding allowances, call the IRS at 800-829-1040 and ask questions. The best part of paying taxes is that you’ve got options for free help.

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