Taxes may hurt, but not filing hurts more

Commentary

April 14, 2009|By Eileen Ambrose | Eileen Ambrose,eileen.ambrose@baltsun.com

One more day to pay your taxes. What if you don't have the money?

As tempting as it would be to ignore the tax bill and hope the Internal Revenue Service won't notice, that's the worst thing you can do.

"Eventually, they are going to catch up to you and send you notices, asking, 'Where is your tax return?' " says Maureen McGetrick, a tax partner with BDO Seidman in New York. "After a period of time, they will file your tax return for you, input your income, tax and interest. And send you a bill."

That's a situation you don't want to be in. If you're having trouble, be pro-active.

The first step is to file your federal return - or request an extension to file - by the tax deadline and send in as much money as you can. This way you'll avoid an onerous penalty for failing to file that's equal to 5 percent of the unpaid tax each month, up to a maximum of 25 percent, says Bob D. Scharin, senior tax analyst with Thomson Reuters' Tax & Accounting business in New York.

If you file on time but can't pay your bill, the consequences are less severe. You'll owe a milder failure-to-pay penalty of 0.5 percent a month - up to 25 percent - plus interest at a rate that adjusts quarterly, Scharin says. Right now, it's an annual rate of 4 percent.

You can request an automatic extension to file your return through the IRS Free File site at www.irs.gov or by submitting Form 4868. Your return will be due Oct. 15. An extension means you have extra time to file but not more time to pay. You'll still owe interest and possibly a penalty.

You have several options to find the money to pay the bill. They all have consequences, and you need to compare the cost of each to determine which is the least expensive way to pay the taxes.

Among the options:

* Beg or borrow. See if friends, family, a credit union or bank will give you a personal loan to cover the tab.

* Consider tapping the equity in your house to pay the bill through a home equity loan or line of credit. The interest paid on these home loans is tax-deductible, Scharin says. Granted, this type of credit is harder to come by these days.

* Borrow from a 401(k), where you will end up repaying the loan with interest to yourself. But this has risks. That money won't be invested, and you could lose out if the market suddenly rebounds. And if you lose your job, you usually have to quickly repay the loan, otherwise it's considered a distribution. You must pay regular income tax on a distribution, and possibly an early withdrawal penalty.

* Pay by credit card. There's a convenience fee averaging about 2.5 percent of the tax bill. That, along with accruing interest on the card, can make this a pricey option.

The IRS says you might be able to deduct the credit-card convenience fee on your tax return as a miscellaneous deduction if you file an itemized return. Problem is, you can only deduct miscellaneous expenses that exceed 2 percent of your adjusted gross income, so this might be a difficult threshold to meet, Scharin says.

* Pay by installment plan, an option a couple of million taxpayers choose each year. If you owe up to $25,000 in taxes and interest, you can request to pay your bill through installments. Make the request through the Online Payment Agreement Application on the IRS Web site, by submitting Form 9465 or by calling the IRS at 800-829-1040. (Those owing more than $25,000 must file the more extensive Form 433-F, the IRS says.)

Under an installment plan, you propose how much you can pay each month based on your finances. Repayment plans can span up to five years and plan proposals are generally accepted, IRS spokesman Eric Smith says.

That doesn't mean the IRS is a soft touch.

"If you miss a payment, you are in breach of the agreement, and the IRS can ask for the full amount," Scharin says.

The fee to set up a payment plan is $105, or about half that if payments are automatically debited from your bank account. The fee for low-income filers is $43.

* Last, offer the IRS less than you owe through a so-called Offer in Compromise. You must fill out Form 656 and pay a $150 application fee.

The IRS says it accepts offers on limited grounds. Those include doubts that the taxpayer will be able to pay over time, questions about whether the tax bill is correct and exceptional circumstances, such as a family needing the money for a child's serious long-term illness.

Marylanders who don't have the cash to pay state taxes can use a credit card, set up a payment plan of up to 36 months or apply for an Offer in Compromise.

Again, if you're having trouble paying your federal taxes, contact the IRS before it contacts you.

"Be as upfront with the IRS as much as possible," McGetrick says. "That only works in your favor in the end."

TIPS FOR WEDNESDAY'S TAX DEADLINE

Doing nothing is a bad idea

File your return - electronically or by mail - or ask for an extension by midnight Wednesday, even if you can't pay your bill. Options abound, including working out a plan with the IRS.

Deliver your return to the IRS Tables will be set up outside its offices at 31 Hopkins Plaza in Baltimore on Wednesday from 9 a.m. to midafternoon.

Procrastinator's last hope Baltimore's main post office, 900 E. Fayette St., is Maryland's only one with extended hours Wednesday. The office will be open 8:30 a.m. to midnight. Other post offices are not open longer because of rising operating costs.

Get your return done for free No-charge tax preparation for those with incomes up to $42,000 is available. Call First Call for Help at 800-492-0618 for locations.

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