You are here: FatWallet Blog > View Blog Entry
Like the beating of the Telltale Heart, you can hear the minutes until your taxes are due ticking away. There's just one big problem: You don't have the money to pay your taxes this year! While this isn't a great situation to be in, there are some reasonable options to help you minimize the impact of this predicament.
You need to be proactive. Ignoring the problem will only make it substantially harder and more costly to resolve. Even if you can't pay all or any of your balance due, it is absolutely critical that you file your taxes. The penalty for not filing your federal taxes is 5% of your unpaid tax balance per mont (up to 25% of the total balance), which is actually substantially steeper than the penalties for not paying your taxes due! All major tax preparation services now offer free online tax preparation if you have a straightforward return. You can also get an automatic six month extension to file (but not an extension to pay) your taxes with the IRS by filing Form 4868 which has just nine lines. Most states will grant you an equal extension without filing a separate form, but be sure to confirm that this is the rule in your own state.
Next, consider all of the resources that you may have available to pay your tax bill. Pay as much as you can now to minimize the interest and penalties that you will incur. Can you borrow from your home equity loan, your family, or take a short-term loan against your retirement savings? As you may know, you can also pay your taxes via credit card, though this can be an extremely costly option, as you'll incur a 2% convenience fee in addition to any interest costs that accrue until you pay off your balance. So carefully consider how long you will realistically need to pay off your past due taxes.
If you owe less than $25,000 and have previously filed and paid your taxes on time, the IRS offers some surprisingly reasonable programs to help you pay your past due taxes. You will generally automatically qualify for an Installment Agreement which will create a 36 month payment plan. You will continue to accrue penalties and interest until your balance is paid in full, but these currently total roughly 7% per year, which may be substantially lower than what your credit cards would charge you. There is also a $52 - $105 setup fee, but if you are experiencing only short term cash flow difficulties and can pay your taxes in full within 120 days, the IRS also offers simpler programs that forgo this fee.
Be sure to investigate the penalties, fees and payment programs for any state or local taxes that you owe as well. If you are able to, it may be less stressful and less costly to pay off your state and local taxes now and deal solely with the IRS.
Remember, your tax bills will not go away, and will only grow over time. Ignore the problem and you'll not only have ever-increasing balances, but will soon experience harsh enforcement actions like levies, liens or wage garnishment. Examine why you owe more than you can pay this year, and if necessary adjust your paycheck withholding or increase your estimated tax payments to avoid having this problem again next year. And as with any tax advice, everyone's situation is unique so be sure to consult your tax advisor to confirm the best options for you.
Kristin Harad is a Certified Financial Planner with VitaVie Financial Planning in San Francisco.
About Us | Blog | Site Map | Mobile Site | Contact Us | Careers | Privacy | User Agreement | D.M.C.A. Notice | Civil Process Policy
Let us complete the Cash Back purchase for you!
Once set up, making a purchase with FW checkout is a breeze. FatWallet Checkout confirms the after-tax price plus shipping and, after you confirm, completes your purchase for you.