March 21, 2018 / 1:21 PM / a month ago

Do not panic if you cannot pay your tax bill

(The opinions expressed here are those of the author, a columnist for Reuters.)

U.S. 1040 Individual Income Tax forms are seen in New York March 18, 2013. REUTERS/Shannon Stapleton

By Gail MarksJarvis

CHICAGO (Reuters) - A couple years ago, Philadelphia-based financial planner Douglas Kobak was sitting across the desk from a client frantic about how to come up with $250,000 to pay his tax bill before a midnight deadline.

“Breathe and don’t freak out,” said Kobak.

While most taxpayers know the Internal Revenue Service can send you to prison or take your house, many do not realize that the IRS offers several options if you cannot pay your taxes in full.

Kobak helped his client set up a monthly payment plan with the IRS and sold a business six months later, allowing the client to pay off all the taxes and late-payment penalties.

“It’s good to know that the IRS can be accommodating and the cops don’t come knocking on the door,” said Kobak.

If you want the IRS to work with you, the first step is filing a tax return.

The IRS imposes one of its harshest penalties on about 7 million taxpayers each year who fail to file a return. The agency imposes a 5 percent late fee on your taxes each month, up to a maximum of 25 percent.

“If you miss filing in 2015, 2016 and 2017, it’s hard to say: Darn I forgot,” said Robert McKenzie, Chicago tax attorney and author of “Representation Before the Collection Division of the IRS.”

If the IRS does not receive a tax return from you, the agency can also just do it for you, with no deductions. You are stuck if you do not fight it in court within 90 days, said McKenzie.

The IRS also imposes a fee for not paying on time of 0.5 percent per month for every month until you have paid all you owe. It can build up to as much as 25 percent of unpaid taxes.

If you are short of cash this April, there are other options besides just skipping out of the process, although none are painless:

** File for an extension

If you cannot pay by April 17 (this year’s deadline), file for an extension using Form 4868. That gives you until Oct. 15 to submit the return and frees you from the harshest penalty – the one for filing your tax return late. But in April, you still must estimate the taxes you owe and pay them. If you pay late, penalties and interest start.

** Pay with credit

If you are short on cash, a credit card will do. But there will be a convenience fee of about 2 percent upfront, so using a card is not wise if you can come up with the cash. You will also incur financing charges and interest on the balance, if you do not pay it off immediately.

** Installment plan

If you owe under $100,000 you may arrange a monthly payment plan for up to seven years with the IRS, said McKenzie. You will still owe penalties and interest on the taxes, along with an initial fee for setting up the installment plan. If you can pay it off within 120 days, you can arrange payments with the IRS less formally (800-829-1040 or bit.ly/2DHWHoR).

** Offer a compromise

To win the IRS’s good graces, tax experts say to file your return on time, pay as much as possible at tax time and explain how you will pay over time. Kobak’s client told the IRS he could afford to pay $1,200 a month and would try to sell the business. The IRS agreed.

Only 38 percent of people who seek a compromise are successful, McKenzie said.

Editing by Beth Pinsker and Lisa Shumaker

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below