What To Do If You Cannot Pay Your Taxes
Tax Payment Alternatives
In this challenging economic climate, many taxpayers find themselves in a position where they are unable to pay the entire amount of tax shown as due on their 2010 income tax returns. The purpose of this tax advisory is to provide options and alternatives to help taxpayers who may be struggling to satisfy their tax obligations.
First and foremost, don’t let your current inability to pay keep you from filing your tax returns on time. Even if you cannot pay the entire amount, filing the return (or requesting an extension) on time with the largest partial payment you can muster will save you substantial amounts in interest and late filing penalties.
The IRS has created a specific tax form (Form 9465) that a taxpayer can include with their 2010 Form 1040 tax return to request an installment payout. The form allows a taxpayer to indicate the amount they can afford to pay each month as well as which day of the month each payment will be due. The IRS will review the request and advise the taxpayer of its acceptance. Note that there is a user fee of $105 that will be assessed by the IRS for processing the installment request.
If you only need a little time to pull together money to pay the tax, another avenue of recourse is to pay your tax liability using a credit card. Three companies provide this service – Official Payments Corp. at 888-872-9829, Link2Gov Corp. at 888-729-1040 and RBS WorldPay, Inc. at 888-972-9829. In addition to the tax, you will have to pay the credit card discount fee of around 2.5% as well as a processing fee. More information can be found at www.irs.gov
Another alternative is borrowing from a third party instead of the IRS. IRS interest rates are currently at 3% per annum in addition to a .5% per month penalty for late payment. This results in a combined rate of 9%. By borrowing from a bank (perhaps with a home equity loan), or borrowing from a family member, you might be able to finance your tax debt at a much lower rate than the IRS. In addition, interest paid on a home equity loan is deductible while interest or penalty paid to the IRS is nondeductible.
There are also undue hardship extensions and offer-in-compromise options, but those are rarely granted except in highly unusual circumstances.
Colorado also offers an option to pay taxes on an installment basis, but the process is different than the one provided by the IRS. There is no special form that needs to be filled out and you do not request the option upfront. Instead, you have to file your tax return and wait for the Department of Revenue to send you an assessment notice (usually within 30 – 45 days). At that time, you can contact DOR to setup a plan to pay the taxes on an installment basis.
We understand that not being able to pay your taxes might be stressful and embarrasing, so we are here to help you understand your options and develop a plan to work through this challenge in an expedient fashion.
Call us today to discuss your specific situation and help you make the right decision!