What to do if you can’t pay your taxes

If your palms are sweaty, you’ve got heart palpitations and you can’t concentrate, it means one of two things: You’re in love, or you owe money to the IRS.

Those who fall into the latter category have about two weeks to come up with the cash. Failure to pay by the deadline could trigger a cascade of unpleasant consequences. Interest and penalties will inflate the amount you owe. The IRS could garnish your wages or your bank account. It also has the power to place a lien on your property, which could ruin your credit rating.

But even if your bank account is bare, you have options. First and foremost, you should file your tax return, even if you don’t have a dime to your name. The penalty for failing to file is 5% of the unpaid tax for each month the return is late, up to 25% of the amount owed, plus interest.

If you file your return without paying the balance due, the IRS will charge a late payment penalty, but that penalty is only one-half of 1% a month, says Robin Christian, senior tax analyst at Thomson Reuters.

Consider, for example, a couple who owe $5,000. If they wait three months to file their return and pay the tax bill, they’ll owe a penalty of $750, plus interest. If they file their return on April 18 and pay the tax bill three months later, they’ll owe $75, plus interest (the amount of interest, which is adjusted quarterly, would be the same in either case).

Another option is to file an extension, Christian says. You can request a six-month extension by filing IRS Form 4868. Approval is automatic. Filing for an extension doesn’t give you more time to pay, so you’ll still owe interest and late-payment penalties for every month you’re overdue. However, you’ll escape the failure-to-file penalty. Include your best estimate of the amount you owe, Christian says.

Have last-minute tax questions?

While filing a tax return will minimize penalties, it won’t prevent the IRS from initiating collection actions against you. To avoid that, you need to pay what you owe. Some options:

Get a short-term extension. If you know you’ll have the money in 120 days or less, ask the IRS for a short-term administrative extension. You’ll still be liable for the failure-to-pay penalty and interest, says Mark Luscombe, senior analyst for tax publisher CCH, but the IRS won’t start collection actions against you.

To request an extension, call 800-829-1040.

Pay with a credit card. The IRS accepts plastic. But unlike most retailers, the IRS won’t cover the cost of processing the transaction. You’ll have to pay the fee, which ranges from 2.35% to 3.93%, depending on which provider you choose. The fee will be added to your balance.

For example, if our hypothetical couple used a credit card to pay their $5,000 tax bill, they’d have to pay $117 to $196 in processing fees.

Other drawbacks to charging it:

•If you don’t pay off your credit card bill by the end of the month, you’ll owe interest on the balance. The average interest rate for variable credit cards is 14.4%, according to Bank-rate.com.

•Your credit rating could suffer. One of the factors used to calculate your credit score is your credit utilization ratio — the amount of your credit outstanding as a percentage of the total amount of credit you have available.

•Your rewards probably won’t offset the processing costs. The average credit card reward is 1% of the purchase, or 1 cent for every dollar spent, according to LowCards.com. That’s significantly less than the average 2.35% processing fee.

American Express will let you use rewards points to pay processing fees. Card holders can also use points to pay their taxes, but unless you’re a really big spender, you probably won’t make a dent in your tax bill. AmEx typically gives card holders a point for every dollar they spend, and it takes 200 points to pay $1 in taxes. That means you’d have to spend $1 million to earn enough points to pay off a $5,000 tax bill.

Set up an installment plan. The IRS offers a program that allows taxpayers to pay their tax bill in monthly installments. If you owe $10,000 or less and are in good standing with the IRS, approval is automatic.


The fee to set up an installment plan is $105, but the IRS will reduce it to $52 if you agree to have payments electronically debited from your bank account. You’ll also pay interest, but the rate, which is adjusted quarterly, is considerably lower than the interest on a credit card balance, says Mary Canning, dean of the school of taxation and accounting at Golden Gate University in San Francisco.

To request an installment agreement, file IRS Form 9465. In general, the IRS will give you up to five years to pay off your debt. You can choose the amount of your monthly payments. Be conservative, advises Sherrill Trovato, an enrolled agent in Fountain Valley, Calif. You can always increase payments, but it’s difficult to ask for a lower payment, she says. And if you miss a payment, the IRS has the right to demand that you pay the entire balance.

Request an offer in compromise. Under certain circumstances, the IRS will agree to accept less than you owe. But despite what you may have heard on late-night TV, the IRS approves only a small percentage of applications submitted to this program.

To negotiate a reduction in your debt, it’s not enough to show the IRS that you don’t have enough money to pay your taxes. You must also convince the government that it’s unlikely you’ll ever earn enough money to pay what you owe.

The fee to apply for an offer in compromise is $150, although the IRS will waive it for low-income taxpayers. You’ll also be asked to document your assets and liabilities in excruciating detail.

It’s not a bad idea to get help from a tax professional who has experience with the program, Trovato says. Steer clear, though, of companies that promise to get your taxes reduced to “pennies on the dollar,” usually for a large, upfront fee. In recent months, several state attorneys general have filed lawsuits against well-known tax resolution companies in response to complaints from dissatisfied customers.


First published in USA Today online by Sandra Block on 3/31/11