Options When You Can't Pay Your Tax Bill
Each year, many people face difficulty paying their income taxes. Fortunately, there are options available to help you meet your tax obligation including credit cards, home equity loans, Offer-in-Compromise, IRS installment plans, and even bankruptcy.
Dallas, TX (PRWEB) February 1, 2005 -- Its that dreaded time of year again: tax season. Although we would all love hefty refund from Uncle Sam, many of us will end up owing the IRS unpaid taxes come April 15. You should always pay as much of your tax liability as possible, whether at the time you file your return or in response to an IRS bill for an unpaid tax balance. Whatever you pay will reduce the balance that the IRS uses to compute interest and penalty charges, so you'll save money in the long run. If you're short on cash and can't pay the entire amount due, there are several payment options available to you including credit cards, home equity loans, Offer-in-Compromise, IRS installment plans, and even bankruptcy.
If you feel like you will owe money to the IRS, perhaps the worst thing you can do is nothing. Many people think that if they delay filing they will ultimately delay payment or collection. This is a big mistake. By not filing on time, you will not delay any collection activities. Rather, you will face additional penalties for failing to file on time. The failure-to-file penalty is 5 percent of the amount of unpaid taxes as of the due date, per month, up to a maximum penalty of 25%. Eventually, the IRS will initiate collection procedures which may include property liens and the eventual seizure of your personal assets. You may also face criminal penalties if you continue to ignore Uncle Sam.
Perhaps you are fortunate enough to have a friend or family member who will loan you the money to pay your tax liability. If this is the case, ask a tax professional about possible tax consequences of borrowing large amounts of money. If you are unable to convince a friend to pay your taxes, the IRS does accept credit card payments. You can split payments over two credit cards if necessary. We recommend using a card with a low interest rate or one that will earn you rewards for its usage, such as airmiles or cash back bonuses. You can make credit card payments through certain tax software programs or through an authorized service provider.
Another very good source of tax money is the equity in your home. Although you might prefer to pay your tax bill with an unsecured bank loan, these loans are typically reserved for those with excellent credit. However, home equity loans are much easier to obtain. Interest rates on home equity loans are typically around 5% APR, which is considerably lower than most credit cards and the finance charges you will pay on an IRS installment plan. In addition, the interest you pay on a home equity line of credit is generally tax deductible. If you decide to use home equity to pay your taxes, we suggest getting an early start on the loan process to ensure that the funds are available to you by the tax deadline. By paying your entire tax liability at one time you will avoid future interest and penalties for unpaid balances. For additional information about other borrowing options and home equity loans, visit www.creditchampion.com.
The IRS can also work with you directly to help you meet your financial obligation. If you disagree with the IRS determination of the amount you owe, doubt you can fully pay what you acknowledge to be your tax liability, or can demonstrate that paying it would either create an undue economic hardship, you can enter into an Offer-in-Compromise. This is a negotiated settlement between you and the IRS that resolves your tax liability. If your offer is accepted, the IRS agrees to settle your unpaid tax obligation, including any interest, penalties, or other additions, for an amount that's less than the total you owe. You must complete Form 656, Offer-in-Compromise. You may also be required to fill out a Collection Information Sheet (Form 433-A or 433-B) and you'll need to provide documents (such as financial statements, pay stubs, and bank records) verifying your assertions.
You may also request a simple installment payment plan. This is a monthly payment plan that you arrange with the IRS. You will not avoid interest and penalty charges with this payment method, but you will avoid more severe collection action as long as you make your payments on time. The IRS may allow you up to 60 months to pay your balance. If you owe less than $25,000 and can pay it off in less than five years, approval of your plan is almost automatic. Counting interest and other penalties, finance charges are around 8% a year, which is still less than most credit card rates. Payments to the IRS can be made by check, payroll deduction, or direct debit from your bank account. To enter into an installment agreement or have questions about Offer-in-Compromise, contact the IRS by mail, or telephone the agency at (800) 829-1040.
A final and last-resort consideration is bankruptcy. Most taxes cannot be avoided in bankruptcy, and it can have significant long-term consequences since bankruptcies can stay on your credit file for up to 10 years. However, if you can reduce your debt burden by eliminating other unsecured debts (such as credit card balances) in bankruptcy, then you will have more money available to pay the IRS. Additionally, in a Chapter 13 or Chapter 11 bankruptcy case, you may be able to gain court approval of a plan to repay the IRS over a period of up to 60 months. While your case is pending, collection activities will stop, and interest and penalties will cease to accrue. We strongly recommend that you consider the consequences of bankruptcy and explore all other payment options first. For additional bankruptcy information visit www.nldc.us/debtoptions.html or consult an experienced bankruptcy attorney.
Contact: Credit Champion, www.creditchampion.com
References:
Internal Revenue Service Tax Information for Individuals http://www.irs.gov/individuals/index.html
Debt Reduction Alternatives www.nldc.us/debtoptions.html
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