A couple years ago,
Philadelphia-based financial planner Douglas Kobak was sitting across the desk
from a client frantic about how to come up with $250,000 to pay his tax bill
before a midnight deadline.
“Breathe and don’t
freak out,” said Kobak.
While most taxpayers
know the Internal Revenue Service can send you to prison or take your house,
many do not realize that the IRS offers several options if you cannot pay your
taxes in full.
Kobak helped his client
set up a monthly payment plan with the IRS and sold a business six months
later, allowing the client to pay off all the taxes and late-payment penalties.
“It’s good to know that
the IRS can be accommodating and the cops don’t come knocking on the door,”
If you want the IRS to
work with you, the first step is filing a tax return.
The IRS imposes one of
its harshest penalties on about 7 million taxpayers each year who fail to file
a return. The agency imposes a 5 percent late fee on your taxes each month, up
to a maximum of 25 percent.
“If you miss filing in
2015, 2016 and 2017, it’s hard to say: Darn I forgot,” said Robert McKenzie,
Chicago tax attorney and author of “Representation Before the Collection
Division of the IRS.”
If the IRS does not
receive a tax return from you, the agency can also just do it for you, with no
deductions. You are stuck if you do not fight it in court within 90 days, said
The IRS also imposes a
fee for not paying on time of 0.5 percent per month for every month until you
have paid all you owe. It can build up to as much as 25 percent of unpaid taxes.
If you are short of
cash this April, there are other options besides just skipping out of the
process, although none are painless:
** File for an
If you cannot pay by
April 17 (this year’s deadline), file for an extension using Form 4868. That
gives you until Oct. 15 to submit the return and frees you from the harshest
penalty – the one for filing your tax return late. But in April, you still must
estimate the taxes you owe and pay them. If you pay late, penalties and
** Pay with credit
If you are short on
cash, a credit card will do. But there will be a convenience fee of about 2
percent upfront, so using a card is not wise if you can come up with the cash.
You will also incur financing charges and interest on the balance, if you do
not pay it off immediately.
** Installment plan
If you owe under $100,000 you may
arrange a monthly payment plan for up to seven years with the IRS, said
McKenzie. You will still owe penalties and interest on the taxes, along with an
initial fee for setting up the installment plan. If you can pay it off within
120 days, you can arrange payments with the IRS less formally
** Offer a compromise
To win the IRS’s good
graces, tax experts say to file your return on time, pay as much as possible at
tax time and explain how you will pay over time. Kobak’s client told the IRS he
could afford to pay $1,200 a month and would try to sell the business. The IRS
Only 38 percent of people
who seek a compromise are successful, McKenzie said.
here for the original article from Reuters.