Don't ignore tax deadline, even if you're short on cash

PERSONAL FINANCE

April 11, 2004|By EILEEN AMBROSE

AS THE TAX deadline approaches Thursday, some individuals are going to be in for an ugly surprise.

No matter how many times they run the numbers through the calculator or recheck the tax tables, they will discover that they just don't have enough money to cover their tax bill.

For those in this tough spot, one of worst things to do is panic and not file at all. By not sending in a return, they'll owe interest on the unpaid tax, plus penalties for not filing and not paying. The penalties alone can reach up to 47.5 percent of the tax liability over time.

Asking for a filing extension won't help either. That only buys more time to file, not to pay.

So, if you're short on cash, make sure you file by the Thursday deadline. And include whatever payment you can afford because that will reduce the amount you'll shell out in penalties and interest, said Lewis Kubiet, manager of the IRS Taxpayer Assistance Center in Baltimore.

In the meantime, too, filers can explore several options to handling a tax bill. The IRS generally is willing to work out a payment plan, although experts advise taxpayers to first investigate other solutions, such as borrowing from a bank, credit union or relatives.

That's because the IRS isn't in the business of lending, so the agency's terms aren't the most favorable, experts said.

"Basically, our interest rate is probably considered competitive with what banks or credit cards will charge," Kubiet said. "The problem is you have your failure-to-pay penalty that boosts it to beyond what you can secure a loan for."

If you are just short of cash briefly - say, a few weeks - consider paying the IRS by credit card, said Bob D. Scharin, editor of Practical Tax Strategies journal in New York. Dragging out payments over a long time on credit cards can be pricey, depending on the interest rate on your card, he said.

To pay by plastic, call toll-free 800-272-9829 or 888-729-1040. You'll pay a one-time "convenience fee" of 2.49 percent. So, the fee on a $1,000 tax bill would be $24.90.

If you will be cash-strapped for a longer period, try borrowing from relatives or the bank, experts said.

Another option is a home equity loan, Scharin said. Additionally, the interest you will pay on a loan, provided it doesn't exceed $100,000, will be tax-deductible, he noted.

Taxpayers might be tempted to borrow from a 401(k) account, but that's not a desirable option for several reasons, said Mark Luscombe, a principal with CCH Inc., a tax information provider in Illinois.

You will lose the benefit of that money growing tax-deferred for your retirement, Luscombe said. You will repay the loan in dollars that have already been taxed, and when the money comes out in retirement it will be taxed again.

Plus, if you leave your job before the loan is repaid, you might have to pay it back immediately. If you don't have cash, you'll owe regular income taxes and possibly a penalty on the unpaid loan, Luscombe said.

If none of these solutions work, contact the IRS about your options.

You can request paying the IRS in monthly installments by filing a Form 9465 with your return.

Filers with a tax bill of $10,000 or less are guaranteed an installment plan provided they have paid income taxes on time in the past five years and agree to pay the tax due within three years.

If the tax liability is more than $10,000 but not over $25,000, filers will have to provide more financial information before being approved for an installment plan, Kubiet said. They generally have five years to pay the tax, he said.

Filers who owe more than $25,000 will need to submit even more details before the IRS gives the thumbs up or down on a repayment plan.

Taxpayers usually find out within a month if their request has been approved. Once approved for an installment plan, a filer will pay a one-time fee of $43.

That's not the only charge. Any penalties and interest that have accrued will be added to the balance. Also, interest and a penalty for failing to pay will continue on the unpaid balance during the repayment period.

The interest rate is set quarterly, and currently it's an annual rate of 5 percent. The failure-to-pay penalty for those in an installment plan is 0.25 percent per month, up to a total of 25 percent.

Miss an installment payment, and the IRS will consider you in default and could take action to collect the entire amount due. To avoid this, the IRS recommends making payments through automatic withdrawals from the bank.

Also, if you are already in an installment plan and find you can't pay this year's taxes, you will be in default. In that case, you can ask to have the plan reinstated to include the new tax due, although approval is not guaranteed, Kubiet said.

In some cases, the IRS may be willing to accept less money if it looks like the agency won't be able to collect.

The IRS might agree to such a deal, called an "offer in compromise," if there's a reasonable question over whether you owe the tax, Scharin said. Also, the agency might settle for less if you just don't have the money to pay the full amount, or if paying the full tax would cause serious hardship, he said.

To apply for a compromise, file a Form 656. Filers must pay a $150 application fee, although it is waived in some cases.

And if you find yourself short of money this year, consider adjusting your W-4 form so that your employer will withhold more taxes from your paycheck so you won't come up short next filing season, Scharin said.

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