THE TAXMAN COMETH

Ways to Postpone the Inevitable If You Can’t Pay Uncle Sam

By Reginald R. Owens, Ph.D.

Worried that you can’t pull together enough dough to pay Uncle Sam next month? Your best strategy is to file your return on time anyway and pay as much as you can, to avoid penalty fees and interest charges . . . because you know what they say about death and taxes. But if you simply can’t come up with the cash to cover your tax bill, there are a few things you can do to postpone the inevitable.

Charge It. Cash poor, credit rich? You can charge your taxes on your American Express, MasterCard, Visa or Discover Card, by going to www.officialpayments.com or  www.pay1040.com. The payment will appear as a retail item on your credit-card statement, not as a cash advance (which often carries a higher interest charge). If you’ve got excellent credit, the interest rate you’re charged by your card provider may well be cheaper than the interest and penalty fees the IRS charges for late payment. Don’t forget, however, to factor in the 2.29 percent convenience fee that both of the above-named services charge for handling the transaction.

File an Extension: The Federal Government provides for an automatic extension of filing time for individual returns. Complete Form 4868, and make sure that you mail it before April 15. I recommend certified mail, return receipt requested. You will then have until August 15 to file your return. Technically, this doesn’t get you off the hook; you’re still expected to send the estimated amount you owe to the IRS by April 15. When filing an extension, it’s to your benefit to at least send in as much of the estimated tax owed as you can, so that you can minimize the penalty and interest payments.

 If you don’t send the full amount, or your estimate is wrong, just keep in mind that when you do submit your return and payment, interest will be charged on the late payment. (The interest rate is determined every three months and is the Federal short–term rate plus 3 percent. Interest is compounded daily.) If you file on time but don't pay all amounts due on time, you'll generally also have to pay a late-payment penalty of one–half of one percent of the tax owed for each month, or part of a month, that the tax remains unpaid from the due date, until the tax is paid in full or the 25 percent maximum penalty is applied.) 

The advantage of filing for an extension is that you eliminate the additional penalty for filing your return late. The total late–filing penalty is usually four and one-half percent of the tax owed for each month, or part of a month, that your return is late up to five months. If your return is over 60 days late, the minimum penalty for late filing is the smaller of $100 or 100 percent of the tax owed.

Still need more time to calculate your tax after the extension period is up? The IRS may provide you with an additional extension until October 15. This is not automatic. You must submit your request for a second extension by August 15, using Form 2688. The IRS will generally send you an approval or denial of the request within seven days, notifying you of your new due date, if the request is approved.

The deadline for filing and paying is automatically extended for those serving in a combat zone. Request Publication 3, Armed Forces Tax Guide, from the IRS (www.irs.gov) for more information about the exceptions and benefits extended to those serving in the Armed Forces.

Apply for the Installment Plan: Using Form 9465, you can apply for a payment plan, which, if approved, will allow you up to 60 months (five years) to pay the amount you owe. After you file the form, it will generally take the IRS 30 days to respond to your request. However, be aware that it might be cheaper to take out a bank loan to pay the full amount on time than to pay the IRS over time, taking into account the penalty fees and interest rates the IRS will charge you. There is also a $43 fee for setting up the installment agreement.

Submit an Offer in Compromise: If the total amount owed is greater than the sum of your assets and future income, or if you can prove an economic hardship or other special circumstances, the IRS may accept less than the total balance due. Submit a reasonable offer in compromise by completing Form 656.

Ask for “Forgiveness” of State and Local Taxes: Some states provide for forgiveness of unpaid taxes. The forgiveness credit may allow eligible taxpayers to reduce all or part of their state or local tax liability. The credit generally gives back some taxpayers the state tax they’ve already paid and forgives some taxpayers their liabilities, if they have not paid. Check with your state revenue department or accountant to determine if you might be eligible.

Consult the Taxpayer Advocate: To find out more about what your options are if you can’t pay, call the Taxpayer Advocate. The Advocate is an independent ombudsman whose job is to protect your rights, help you resolve problems and represent your interests to the IRS. You can contact the Taxpayer Advocate, toll free, at 1-877-777-4778. TTY/TDD help is available at 1-800-829-4059. For more information, go to www.irs.gov.

          The Advocate’s advice and counsel are free. Just another service paid for by. . . you and your taxes!

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 Reginald R. Owens, Ph.D., writes frequently for magazines on topics relating to finance and business management. He is the Publisher of MAKING BREAD magazine.