Unable to pay the IRS taxes for 2011 or by April 17th? If so, you have several options for paying your taxes when you don’t have the money available in the short-term or the long-term.
When deciding which option is the best for you, you’ll want to consider how much time you need and how much each option will cost you in fees and interest.
To reduce interest and penalties, pay what you can by April 17th, without jeopardizing your basic living necessities. When in doubt, consult with the IRS and/or a tax professional.
What if You Can Pay Your Taxes in About 4 Months?
If you can come up with the money you owe the IRS within 120 days of April 18th (due date this year), you have a few options for paying your taxes. Weigh all options to determine which will allow you to pay your taxes and resolve your tax problems for the least amount of money:
- You can call the IRS at 1-800-829-1040 to let them know you can pay your taxes in this time frame or less. They will charge you interest and an underpayment penalty compounded monthly on the unpaid balance. Note that you will not incur a setup fee like with an IRS Installment Agreement.
- You can pay your taxes by putting the tax balance you owe on a credit card. The IRS will charge a credit card tax payment convenience fee for allowing a credit card payment (you need to consider this cost), and then you’ll also pay whatever interest rate your credit card charges you for carrying a balance (another cost).
- Using the money you have in savings accounts, bonds, or stocks may be a great option although if you have capital gains you could create capital gains tax liabilities for 2012. This will help you avoid paying interest on short-term IRS payment plan, a fee for paying your taxes with a credit card, or even monthly credit card interest.
- Borrowing from your 401(k) or retirement accounts is another option. You can borrow normally with a 401(k) up to 50% or no more than $50,000 (check with your financial advisor or tax professional). However, you have to pay back the 401(k) within 5 years and you will be charged interest. However, the benefit here typically is that the interest is paid back to yourself. You need to consider that you might be earning comparatively less in your 401(k) because of the withdrawal. If you fail though to pay back your 401(k) in time (if your 401(k) plan allows it in the first place), then you will be assessed a 401(k) withdrawal penalty and taxes on the amount withdrawn. Therefore, check with your financial advisor and/or tax professional before pursuing this.
- You may also want to consider a cash advance or payday loan but normally the interest is very high and will cost you more in most cases. This is highly not recommended.
I Cannot Pay My Taxes In the Short-Term. Now What?
If you need more time than 120 days to pay off your tax debt or tax bill, you’ll want to consider a bank loan or an IRS installment agreement. If you owe more than $25k, make sure you don’t have assets you can use to satisfy part or all of the debt. The IRS with an Installment Agreement may require a Collection Information Statement from you to determine your monthly payment and see if you qualify, especially if you owe more than $25,000.
- An IRS installment agreement or payment plan lets you pay monthly payments over a period of 3 to 5 years, depending how much money you owe. You’ll pay around 3% interest compounded daily (2012 q1 figure) with an underpayment penalty reduction to .25% per month (normally). The interest rate is adjusted quarterly. It also costs between $52 and $120 to set up the installment agreement, depending on the payment method. Make sure that your monthly payment is affordable and big enough so your balance decreases each year. The faster you pay off an Installment Agreement, the less interest and penalties you pay.
- If you are able to obtain a bank loan (e.g. personal loan, cash out refinance) with a lower fixed interest rate, you may want to look at the bank option over an installment agreement option. You may still consider a loan even if its rate and interest is higher than the combined cost of an Installment Agreement, because the interest rate on unpaid taxes can only go up from here.
Don’t Qualify for a Tax Payment Plan or Bank Loan?
If you do not qualify for a loan from a financial institution, or cannot make the monthly minimum payment on an IRS Installment Agreement, or if you just don’t qualify for an Installment Agreement, you will want to look at other avenues. This is important, especially if you are facing financial hardship.
Here are some other options to consider:
- Offer In Compromise (OIC)
- Being Declared Uncollectible
- Partial-Payment Installment Agreement (easier to obtain than an OIC)
With the options above it is highly recommended work with a tax professional such as a CPA, tax attorney or enrolled agent because things can get complex. In summary, having an IRS tax problem is not uncommon, nor is coming to a resolution with the IRS. The most important thing to prevent the most damage, is to address the situation now, not later.